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PMP Cost Management Demystified

PMP Cost Management DemystifiedPMP Cost Management Demystified

The topic of cost management, similar to time management, as critical formulas that must be learned and understood.  The use of the earned value method we’ll be applied within this PMP knowledge area.

Many of the principles and techniques used within the cost management knowledge area did not originate with the project management institute, but were derived from longstanding practices within the field of cost accounting, managerial accounting, and finance.

Memorizing and applying the various formula and techniques within this knowledge area is vital in order to pass the exam.

It is also essential that you know the main outputs are the produced during each of the four processes, and this includes the different tasks that are performed within each process.

The cost management processes

There are just four processes:

Plan cost management.  The main output here is the cost management plan

Estimate costs.  The main output here are the activity cost estimates

Determine budget.  The main outputs here are the cost baseline and the funding requirements

Control costs.  The main outputs here are work performance information and cost forecasts

The cost management approach

Where the actual tools and techniques behind cost management may be different from time management, the driving philosophy has several similarities.  Costs should be planned, identified, and measured.

The project manager should tie costs back to activities and resources, and build the estimates from the bottom up.

It is common practice for high level budgets to be determined prior to know in costs.  The reason for this is that many companies use fiscal year planning cycles that must be done far in advance of their project planning.

Budgetary constraints are a fact of life, but instead of blindly accepting whether the budget is specified by management, the project manager carefully reviews the scope of work and the duration estimates and then reconciles them to the scope and project costs.

Adjustments to the project scope, the budget, or the schedule and much easier to justify by working up from a detailed level instead of from the top down.

Although summary budgets are often the first thing created in the real world, when it comes to a detailed planning, the overall approach advocated here is scope first, schedule second, and budgets third.

It is best practice that all estimates should be built from the bottom up.  At the point in the process where budgets are created, you will need to have a well-defined work breakdown structure, an activity list with resource and duration estimates for each activity, and a schedule.

Now budgeting becomes a task and applying rates and schedule against those resources and activities to create activity cost estimates and the cost baseline, following the cost management plan.

It is the project manager’s job to constantly monitor and control cost against time, scope, quality, and risk to ensure that all projections remain realistic and clearly defined.

The earned value method formulas

Earned Value Formula

Learning the 13 key formulas for cost management is vital as well as being able to apply them.  Luckily the formulas are not particularly difficult.

It is important that you not only memorize these four riders but that you understand them.  Once you grasp EV as concepts, the memorization will be far easier.  Indeed, it is possible that you only need to memorize the concepts and reconstruct the former is as needed.  This is possible because each formula does make sense.

Lifecycle costing

This technique does not fit within any particular process, but there is an important concept for you to understand.

Instead of simply asking “how much will this product cost to develop” lifecycle costing looks at the total cost of ownership from purchased or creation, through operations, and finally to disposal.

It is a practice that encourages making decisions based on the bigger picture of ownership costs.

As an example, it may be less expensive for the project to use off the shelf applications software.  But if the organization will need to maintain and update such applications, and even though it may be more expensive initially, it may be a better choice to develop them in house from the outset.

Value engineering

Similar to the above, this also is an important technique that may be applied across one or many of the processes.

Value engineering is the practice of trying to get more out of the project in every possible way.

Value engineering tries to increase the bottom line, decrease costs, improve quality, shorten the schedule, and generally squeeze more benefit and value of each aspect of the project.

The key to value engineering is that the scope of work is not rig had used by these other efforts.

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