The distinct elements of the project management plan that are useful in developing your own cost management plan are the scope and schedule information contained in the scope baseline and schedule baseline, respectively. After it is created, the cost management plan becomes part of the project management plan. The project management plan is an output from the Develop Project Management Plan process.

The project charter contains the approved initial budget for the project at the time of project initiation. It also contains known constraints, assumptions, and risks that may affect project costs and their management. The project charter is an output from the Develop Project Charter process.

Particular enterprise environmental factors that may assist with development of your cost management plan include the particular organizational culture and structure, any external market conditions that may affect project costs, and any published commercially available cost information that you may use to develop and check your cost estimates.

Organizational process assets that may play an important part in the development of your cost management plan include any historical information and any established financial control procedures, policies, and templates for defining and controlling project costs and budget.

Expert judgment is used as a tool and technique in the Plan Cost Management process as again you rely on the experience, opinion, and expertise of individuals to assist with the development of a cost management plan. The experts you consult may be members of your project team, other employees in your organization, or people from outside your organization with particular experience in putting together an appropriate cost management plan.

Analytical techniques are an important tool in the development of your cost management plan because you or your financial department must analyze options and make decisions about how the project will be funded. You may be able to fund the project with cash reserves, bank loans, funding with equity from shareholders, or funding with debt from other sources. Each of these options has its own benefits and drawbacks. In making the decision, you can use a number of techniques such as payback period, return on investment, internal rate of return, discounted cash flow, and net present value. Each of these terms was discussed in more detail in the Develop Project Charter process as part of the project selection process.

Meetings are a great way to bring together members of the project team who have expertise and skill in development of the cost management plan, because they are the people completing the work. You may also choose to invite selected stakeholders from outside the project team who have specialist knowledge and skills in this particular area. An example would be inviting members of your organization’s financial or accounts department to contribute to the development of the cost management plan.

The cost management plan is then a key input into the Estimate Costs and Determine Budget processes , both of which are planning processes.

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The cost management plan is obviously a key input into the Estimate Costs process, because it provides the guidance for how you are going to complete this process. Without it, you would not be able to complete the process. The cost management plan is an output from the Develop Cost Management Plan process.

The human resource management plan is used as an input into the Estimate Costs process because it contains information about the project staff who will be working on the project and the charge-out rates, remuneration packages, and any other financial rewards to be paid to them. In order to develop the project cost, you need to know this information. The human resource management plan is an output from the Plan Human Resource Management process.

The scope baseline is composed of the project scope statement, the work breakdown structure (WBS), and the WBS dictionary, and it contains a full and detailed description of all the work to be done on the project. By using this information, you can attribute costs to each of the work packages and also the activities taken from the project schedule, and aggregate these costs into a total project cost estimate. The scope baseline is an output from the Create WBS process.

The project schedule is an important input into the Estimate Costs process because it gives an indication of when the work packages and activities are to be completed. The sequencing, timing, and duration of distinct project work packages and activities affect the costs. The project schedule is an output from the Develop Project Schedule process, which in itself is the culmination of the other schedule management planning processes.

The risk register is used as an input into the Estimate Costs process because it contains information around defined and documented uncertainty relating to specific work packages. This uncertainty is captured in the contingency reserve for each activity work package and needs to be taken into account in developing the project cost estimates. The risk register is an output from the Identify Risks process.

The specific types of enterprise environmental factors that are useful as inputs into the Estimate Costs process are external market conditions that will affect the prices of products and services being procured for the project, and any published commercially available estimating data.

The specific types of organizational process assets that are useful as inputs into the Estimate Costs process are any relevant templates and processes useful in the development of project cost estimates, including any historical information and lessons learned owned by the organization.

The use of experts is an acknowledged tool in the preparation of project cost estimates. The experts, or people working on the project, have intimate knowledge of the work to be done and the likely cost of that work. In addition to project team members with expert judgment on the work to be done, you may also choose to consult external experts, such as those involved in the quantity surveying profession, who can provide expert advice on the expected costs of materials and resources to be used.

Analogous estimating is a quick means of estimating a likely cost for a particular material or resource by comparing your current requirements with the requirements of a previous project you have information on, and then looking at the similarities between the two instances to determine your current estimate. For example, if on a previous project you used a particular amount of concrete and it cost $1,500, and on this project you expect to use twice as much, you would assume that your cost estimate is $3,000, by using analogous estimating. Because you are using an analogy from previous experience, there is a certain degree of expected inaccuracy in this form of estimating.

Parametric estimating is generally considered to be more accurate than analogous estimating because it uses known quantities of materials for resources and multiplies them by known financial rates. For example, you may know that you require 50 hours of work to be done by a business analyst, and that a business analyst costs $80 an hour; therefore, multiplying 50 hours by $80 an hour, you will arrive at a cost estimate of $4,000 by using parametric estimating.

Bottom-up estimating is generally considered to be quite an accurate form of estimating. You take cost estimates from lower-level information—for example, the bottom level of the WBS—and then add up, or roll up, to higher levels and aggregate those costs to report a total cost.

You saw the use of three-point estimating in the Estimate Activity Durations process from the Schedule Management knowledge area. Here it is used again as a method of determining an estimate where there is a most likely (cM), an optimistic (cO), and a pessimistic (cP) cost estimate for an activity.

To get a simple average, which is used with a triangular distribution, you take these three figures and add them together and divide by 3. The formula is

However, if you want to get a weighted average that gives greater weight to the most likely (cM) figure and is typical of a beta distribution, the formula to use is

For example, if you have an optimistic cost estimate of $10, a most likely cost estimate of $16, and a pessimistic cost estimate of $25, the weighted average using three-point estimating is $16.50.

You can also calculate the standard deviation, which indicates how far from the average the optimistic and pessimistic figures are. A smaller standard deviation means they are closer to the average than a larger standard deviation. The formula for standard deviation is

For example, using the numbers from the previous example, the standard deviation is $2.50.

After you have determined the standard deviation, you can then express your certainty about a cost estimate range. You express this certainty as a confidence interval, where one standard deviation either side of the mean represents a confidence interval of 68%, two standard deviations either side of the mean gives a confidence interval of 95%, and three standard deviations either side of the mean gives a confidence interval of 99.7%.

For example, using the numbers from the previous example, you could say that you have a 95% certainty that the cost for the activity will be between $11.50 and $21.50.

Reserve analysis looks at the contingency reserves, or contingency allowances, provided for in the project cost estimates. The contingency reserve is an amount that reflects and allows for identified uncertainty in estimating particular costs. It is commonly known as “accounting for the known unknowns” in any project and is usually calculated during quantitative risk analysis performed as part of the Risk Management knowledge area. For example, you may determine that a particular activity has a 10% chance of experiencing a $1,750 cost overrun, and therefore you allow $175 ($1,750 × 10%) in the contingency reserve. By aggregating, or adding up, all the individual amounts allowed for in the contingency reserve analysis, you arrive at a total contingency reserve for the entire project.

The management reserve for unknown unknowns can also be calculated during risk assessment or by expressing the range of uncertainty in your estimates as a total amount. The management reserve is controlled by senior managers, and the project manager must apply to use it; it is not part of the approved budget.

Project management software should be considered essential for any large and complex projects, because trying to collect and aggregate many cost estimates manually is simply not possible.

The vendor bid analysis process is a way of double-checking the bids received from vendors to make sure they are neither overinflated nor underinflated. You can think of vendor bid analysis as your quality check on the prices people are submitting to you.

Good cost estimates are prepared by people familiar with the activities being estimated, and when you get a group of these people together, you need effective group decision-making techniques to make sense of the expert opinions supplied. These techniques are also used when estimating elements of the project schedule and include brainstorming, nominal group techniques, and the Delphi technique.

The activity cost estimates are the individual estimates for each activity identified. They are the entire focus of this process and are used to put together your cost baseline. The activity cost estimates are used as an input into the Determine Budget process.

The basis of estimates is a useful document because it outlines the assumptions made, the type of estimating technique used, any known constraints, and an indication of the range of uncertainty and of the confidence level of the final estimates for each activity and, indeed, the entire project. The basis of estimates is used as an input into the Determine Budget process.

The specific project documents that may be updated as a result of estimating costs include such things as the statement of work, which may be updated as a result of the cost estimates, and elements of the risk register that are refined and updated as a result of specific cost estimates.

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The cost management plan is used as a key input into the Determine Budget process because the cost management plan sets out the processes, policies, rules, and regulations that you will apply in order to determine a project budget. The cost management plan is an output from the Plan Cost Management process.

The scope baseline is a very important input into this process because it outlines all the work to be done, and the work not to be done, as part of the project. By breaking down the scope baseline into its component parts via the WBS and subsequently down to activity level with the schedule of work, you can estimate individual activity costs. The scope baseline consists of the project scope statement, the WBS, and the WBS dictionary, and it is an output from the Create WBS process.

The activity cost estimates provide you with individual estimates of cost for identified activities by using a variety of tools and techniques from the Estimate Costs process. In order to put together your project budget, you take these individual activity estimates, aggregate them, and determine the time period in which those costs will be incurred. The activity cost estimates are an output from the Estimate Costs process.

The basis of estimates is an important input because it provides further information about each of the estimates you have determined for the individual activities. The basis of estimates is an output from the Estimate Costs process.

The project schedule is used as an input into the Determine Budget process because you need to know when each activity will be performed so that you can determine when the costs of activity will be incurred. This is the essence of developing a project budget: taking the project costs and applying them over time. The project schedule is an output from the Develop Schedule process.

Resource calendars are used as an input into the Determine Budget process because they provide additional and more detailed information about when specific resources are available to work on the project. They are an output from the Acquire Project Team process.

The risk register is used as an input into this process because it identifies risks associated with both individual activity cost estimates and elements of the project schedule that need to be taken into account when developing the project budget. It is an output from the Identify Risks process.

Any existing agreements are used by the project manager as an input into this process because they outline any agreement between parties to the project about costs, payments, and any other matters, such as retention payments, that need to be included in the project budget. For example, you may have an agreement for paying suppliers that requires payment regularly each month, or one that requires progress payments at certain project milestones. These agreements are an output from the Conduct Procurements process.

The specific organizational process assets that can assist in the development of the project budget include any organizational policies and procedures relating to the development and presentation of the project budget, and any blank templates for preparing budgets and for reporting the budget.

Cost aggregation is the process of taking the individual estimates for each of the activities, aggregating upward to the work package level, and then rolling these estimates up to high-level, sub-deliverable level, and deliverable level to arrive at a bottom-up estimate for portions of the project or the entire project. Figure 5-2 shows how individual activities are added up, or aggregated.

Reserve analysis is a method of looking at both the contingency reserve and the management reserve required for the project and the timing of access to those reserves. Contingency reserves are identified for specific uncertain activities, or known unknowns; access to the contingency reserve will be when the activity is being performed. The contingency reserve is approved as part of the project budget and is under the control of the project manager.

Access to the management reserve, which is for unknown unknowns, could be required at any time in the project. Use of the management reserve requires approval from management; once approved, it is added to the cost baseline.

Again, expert judgment is a key tool and technique in determining the budget. The experts should be from the project team and also from outside the project team: for example, from the organization’s finance or accounts department.

If the organization is mature enough to have been recording information about historical relationships and the reliability and range of uncertainty in its cost estimating process, it can use this information to further refine its current cost estimates or to acknowledge a quantifiable amount of uncertainty in those estimates.

As part of the Determine Budget process, you may find that there are funding limit reconciliation issues that need to be considered. For example, you may want to do more work but simply will not have the funds until a later time; therefore, you have to limit the activity on the project until funds to complete the work become available.

The cost baseline is one of four baselines you will use to measure progress on the project. The other three are the scope baseline, the time baseline, and the quality baseline. The key element of the cost baseline is that it takes the aggregated individual estimates of cost for each activity and applies them to the time periods in which the costs will be accrued. This is the baseline against which you will measure project cost performance. Figure 5-3 shows an example of a cost baseline represented graphically. It shows the total amount of spend for each time period, in this case in months. Additionally, it shows the cumulative spend over the life of the project. This is represented by the line, which is often referred to as the S-curve because it is in the shape of the letter S. There is little spend at the beginning of a project, a lot of spend in the middle section of the project, and a decrease in spending toward the end of the project.

The project funding requirements acknowledge when the funding for the project will be available: for example, annually, quarterly, or monthly. This recognizes that funding for a project often occurs in incremental amounts, whereas expenditure on a project may be continuous.

The types of project documents that may be updated as a result of the Determine Budget process are the individual cost estimates, project schedule, and risk register.

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The project management plan and its subsidiary plans guide you in the process of controlling any potential changes to your cost baseline or any of the individual estimates that were prepared. As such, it is an important input into the Control Costs process. The project management plan is an output from the Develop Project Management Plan process.

The project funding requirements are an important input into the Control Costs process because they enable you to determine when expenditures will be incurred and when funding for the project will be available, and to therefore assess actual versus planned project funding requirements and control any changes to these elements. The project funding requirements are an output from the Determine Budget process.

By now you should have picked up that work performance data is an important input into several controlling processes. Work performance data is the information you gather about what is actually occurring on the project down to the level of which activities have started, the costs associated with completing those activities, and any estimates for completing the remainder of the work to be done. Work performance data is an output from the Direct and Manage Project Work process.

The types of organizational process assets that are useful as inputs into the Control Costs process are any existing organizational policies, procedures, templates, or other elements relating to how costs will be monitored and reported on in your project.

The earned value management (EVM) system provides an effective and efficient way of to establish what has occurred in the past and to use this information to forecast likely future scenarios by using a range of mathematical equations. It is better than simply taking one or two elements of past performance and expecting that performance to continue. For example, imagine that you are a project sponsor, and your project manager tells you that the project is 50% of the way through and has spent only 40% of the budget. Is this a good situation? It may be, but without knowing how much of the actual work has been completed and how much value has been earned, you don’t really know if this is a positive statement. This is exactly the scenario that EVM can get around.

EVM takes the original project cost baseline , the planned value of the work you had expected to have completed by now, the earned value of the work you have completed, and the actual cost of delivering that value, to determine the project cost and schedule performance to date and then forecast the likely costs at completion. It does this by using the following formulas:

Forecasting is the process of taking time and cost performance to date and using this information to forecast a likely future scenario. The time and cost performance measurements are the cost variance (CV), schedule variance (SV), cost performance index (CPI), and schedule performance index (SPI). You can use these measurements and the following formulas to forecast a likely project cost at completion, the amount of money required to complete the project, and the difference between what you originally thought it would cost and what you now think it will cost:

The to-complete performance index (TCPI) tells you the rate at which you have to work to achieve either your EAC or your BAC, depending on which one you are targeting. A TCPI of less than 1 is good, whereas a TCPI of more than 1 is bad. If you are using the original BAC as your target, the formula is

If you are using the EAC as the target, the formula for TCPI is

Performance reviews are conducted via a variety of means, including EVM variances and trend analysis. You already have seen the use of EVM variances for the calculation of both the cost variance (CV) and schedule variance (SV) using EVM. These are the most frequently used methods of determining variance and performance.

In addition to EVM variances as a performance review tool, you can use trend analysis, which looks at past performance and extrapolates from that a likely future performance, usually by using graphs and linear regression.

Project management software is very useful in monitoring the performance of cost on a project because it can quickly do what would take a lot of time if done manually. Additionally, it can take both the original data and any data from calculations and display it graphically for easy interpretation and communication.

Reserve analysis in this monitoring and controlling process is the process of re-examining the original reserves calculated—both the contingency and management reserves—and checking whether the assumptions made when calculating them are still valid, and also releasing any unused portions of contingency reserves from the approved project budget in order to enable other projects to access the pool of funds.

The easiest way to display work performance information based on the work performance data is by using the earned value calculations for CV, SV, CPI, SPI, and the TCPI. The work performance information goes on to be used as an input into the Monitor and Control Project Work process.

Cost forecasts are obtained from the EAC values. Cost forecasts go on to be used as an input into the Monitor and Control Project Work process.

One of the key outputs from any controlling process is change requests that arise as a result of either variances detected or additional information provided. Change requests may include preventive or corrective actions. All change requests are processed as per your documented and approved change-control process.

Change requests go on to be used as an input into the Perform Integrated Change Control process from the Integration Management knowledge area.

Specific parts of the project management plan that may be updated as a result of the Control Costs process include the cost baseline and the cost management plan. Project management plan updates are used in turn as an input into the Develop Project Plan process.

Specific project documents that may be updated as a result of the Control Costs process include any documentation relating to how you build up your cost estimates, such as the cost baseline and the basis of estimates document.

Specific organizational process assets that may be updated as a result of the Control Cost process are historical information, records of financial information kept, lessons learned, records of corrective actions, and updates to any organizational financial templates and policies in order to ensure that they are still relevant.

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(b) Based on the information gained from the calculations you have performed, how is the project performing in terms of both cost and time?

Based on the information from the earned value calculations, the project is ahead of schedule because the schedule variance (SV) is positive and the schedule performance index (SPI) is greater than 1. The project is also under budget, because the cost variance (CV) is positive and the cost performance index (CPI) is greater than 1.