Chapter 7: Managing Project Costs

  1. Actual Cost
    Total amount spent to date
  2. Analogous estimating
    • Relies on historical information to predict the cost of the current project.
    • AKA top-down estimating
    • least accurate method
  3. Bottom-up Estimating
    • Accounts for each component of the WBS to create a sum for the project.
    • Most time consuming and most reliable
  4. Budget estimate
    • Broad, early estimate
    • Range can be from -10 to +25%
  5. Contingency reserve
    • Allowance for cost overruns
    • Used at PM's discretion and with management approval to counteract cost overruns
  6. Cost aggregation
    • Costs are parallel to WBS work packages
    • Each work package cost is aggregated to a corresponding control account
  7. Cost baseline
    time-lapse exposure of when project monies are to be spent in relation to cumulative values of the work completed
  8. Cost budgeting
    Cost aggregation achieved by assigning specific dollar amounts to each activity or work package
  9. Cost change control system
    Examines any changes associated with scope changes, cost of materials, cost of other resources, and associated impact on project cost
  10. Cost management plan
    Dictates how cost variances will be managed
  11. Cost of poor quality
    • Money spent to recover from not adhering to expected quality level.
    • May include rework, defect repair, medical, loss of sales, loss of customers, etc.
  12. Cost of quality
    • Money spent to attain the expected level of quality within a project
    • Includes training, testing, safety, etc.
  13. Cost Performance index
    • Measures the project based on its financial performance
    • CPI = EV/AC
  14. Cost Variance
    • Difference of teh earned value and the cumulative actual project costs.
    • CV = EV - AC
  15. Definitive estimate
    • Used late in the planning process
    • One of the most accurate methods
    • bottom-up estimate
    • Range of variance is -5 to +10 percent
  16. Direct costs
    • Attributed directly to project work
    • cannot be shared among projects
  17. Earned value
    Physical work completed to date and the authorized budget for that work
  18. Estimate at completion (EAC)
    Forecasting formulas predict teh likely completed costs of the project based on current scenarios
  19. Estimate to complete (ETC)
    • formula that predicts how much funding the project will require to be completed
    • There are 3 variations based on conditions the project may be experiencing
  20. Fixed costs
    • Costs that remain constant through the life of the project
    • ex: cost of a piece of rented equipment, a consultant, etc.
  21. Funding limit reconciliation
    an organization's approach to managing cash flow against project delieverables based on a schedule, milestone accomplishment, or data constraints
  22. Indirect costs
    • Costs that are representative of more than one project
    • ex: utilities, facilities, software licenses, etc.
  23. Known unknown
    • Event that will likely happen, but the timing and degree are unknown
    • These events are usually risk related
  24. Learning curve
    Assumes cost per unit decreases the more units workers complete because workers learn as they complete required work
  25. Oligopoly
    Market is so tight that the actions of one vendor affect actions of all others
  26. Opportunity cost
    Total cost of an opportunity that is refused to realize an opposing opportunity
  27. Parametric estimating
    • Uses a parametric model to extrapolate project costs
    • ex: cost per hour or unit
  28. Planned value
    • Work scheduled and the budget authorized to complete that work.
    • Reflects where the project should be at this point in time.
  29. Project variance
    • Final variance, discovered only at the project's completion
    • BAC-AC
  30. Regression analysis
    • Statistical approach to predicting what future values may be, based on historical values
    • Creates quantitative predictions based on variables within one value to predict variables in another
    • Relies solely on pure math to reveal relationships between variables and predict future values
  31. Reserve analysis
    • Cost reserves are for unknown unknowns in a project
    • Part of the project budget but not the project baseline
  32. Rough order of magnitude
    • rough estimate used during the initiating processes and in top-down estimates
    • range can be from -25% to +75%
  33. Schedule performance index
    • Measures the project based on its schedule performance
    • SPI = EV/PV
  34. Schedule variance
    • the difference between earned value and planned value
    • SV = EV - PV
  35. Single source
    Many vendors can provide an item, but you prefer to work with just one
  36. Sole source
    • Only one vendor can provide something
    • ex: specific consultant, specialized service, unique material
  37. sunk costs
    Monies that have already been invested in a project
  38. To-complete performance index
    • formula to forecast the likelihood of a project to achieve its goals based on what's happening in the project right now
    • Using original budget: TCPI = (BAC-EV) / (BAC - AC)
    • Using new estimate: TCPI = (BAC-EV) / (EAC - AC)
  39. variable costs
    costs that change based on the conditions applied in the project (number of participants, etc)
  40. Variance
    difference between what was expected and what was experienced
  41. Variance at completion
    • forecasting formula that predicts how much of a variance the project will likely have based on current conditions within the project
    • VAC = BAC - EAC
Card Set
Chapter 7: Managing Project Costs
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