PMI CAPM – Estimate, Budget, and Control Project Costs

1. Section Overview

As soon as the project is even considered to be initiated, it seems like stakeholders, management, your sponsor, and customers are all going to ask: “How much is this going to cost?” And no matter what type of range of variance you put on it, like plus or minus 100%, whatever number you put out, It seems like that’s what people immediately gravitate toward. Well, you said it was this much. I know it; we’ve all experienced it, so in this section, we’ll go over the entire cost management concept, from the initial estimate to cost planning and control.

So we’ll look at planning and cost management. This is going to create a subsidiary plan, the cost management plan of our project plan. This plan defines three things to look for in this section. So pay attention to planning and cost management. We’re going to look at all of the contents of the cost management plan. So what’s your estimating approach, your budgeting approach, level of precision, units of measure, reporting formats, all sorts of business here in the cost management plan that you want to know for your exam? We’ll look at estimating the cost.

So predictions are based on the information you have available today. So remember how on the first day, everyone was asking me, “How much?” have a very little amount of information. As we progress through the elaboration process and more information becomes available, I’m able to be more and more precise about how much this thing will cost. So we’ll talk about that. We’ll also consider trade-offs versus the risk associated with those trade-offs. So should I buy it? What about leasing it? Can I share this resource? So it’s setting us up a little bit for our risk chapter, module eleven in the pinbox, the level of accuracy. This is what I was talking about—that range of variance. So we have a rough order of magnitude. Some of you call that a wage estimate; I’m not sure what that means. A budget estimate, a definitive estimate Those are the terms you’ll want to know for your exam. a rough order of magnitude of budget and a definitive list.

So pay attention to those. We’ll talk about them in this section. Remember the analogous estimating that we did back in time? Hey, we can do that here at no cost as well. So we’ll do analogous estimating; we can do parametric estimating, the same thing we did back in time. And we can do bottom-up estimating; that’s a new one. Well, this is the definitive estimate. So we’ll go over bottom-up. Bottoms up does not imply starting at the bottom and working your way up. So pay attention to that in this section. And, yes, a three-point cost is possible.

So just like we did back then, you can do that with a cost meeting as well, a three-point estimate. Remember, it’s the average. This helps us determine our budget. And sometimes your budget is determined for you. But we’ll talk about how we aggregate the estimated costs to build a proper budget. So it’s the cost of the work packages and the activities. This then becomes our authorised cost baseline. So, for this process in this section, we have to do funding limit reconciliation. You have to reconcile what was estimated, what was planned, and what you actually experienced. The difference between the two is a variance. So we want to pay attention to that. We had scope control; we had schedule control. So it only makes sense that we’re going to have cost control.

So, yes, cost control; change request, no. However, we must also manage those changes and how they affect our costs. We have to track our costs and then respond to those costs in the project. So communicating that cost status and then paying attention and responding to cost overruns and any variances In this section, we’re going to get into a really important topic for a lot of people and your exam. And that’s earned value management. So this is a suite of formulas that show project performance. And in this section, you’re going to have an opportunity to complete an activity to help you remember earned value management. Just practise repetition. The mother of learning Okay, let’s get in here and look at cost management right now.

2. Plan Project Cost Management

In this lecture, we’re going to talk about planning project cost management. As you’ve seen with every knowledge area, we start off with a planning process. So it’s no different than the cost of hearing time. We are going to plan for cost management. This is all about creating an estimate, controlling and planning how to control the budget, and then tracking the ongoing cost of the project. So let’s hop in here and talk about creating the cost management plan. So the cost management plan is being recreated. And this is a part of the project management plan. It addresses three cost management processes: how costs will be estimated, how the project budget will be managed, and how costs will be controlled throughout the project.

The EDOs for creating the cost management plan are pretty straightforward. You need the project management plan, the project charter, enterprise environmental factors, and organisational process assets—three tools and techniques. You need expert judgment and analytical techniques because you’re going to study, and that will help you predict the cost and then meetings, and then the output here will be the cost management plan. Notice that the cost management plan tells us how to create estimates, how the budget will be managed, and how costs will be controlled. It’s not actually the cost estimates. In fact, the cost management plan really is all about your intentions for managing costs. So like all of our plans, organisational process assets are really a key here. I can take a previous project that’s similar and then adapt it to the current project, using it like a template. Let’s look at the details of the cost management plan. As I just mentioned, the cost management plan is all about the cost estimating approach. How will you estimate the cost? It’s the budgeting approach.

So how will the budget be created and assigned, and then when will you actually spend the actual monies on your project’s needs and resources? What are your cost-control measures? So, how do you know if you’re doing well or poorly on cost? And how will you respond if there are cost issues in the project? What’s your level of precision? Now, what is your range of variation? So you’re saying you’ll make $100,000 plus or minus 5% plus or minus 3%? So what is your level of precision? And then we also take that one step further. It also means, are you rounding up or down? Is it $100,000.25 or is it just 100k? So your level of precision and then units of measurement So this really has three things to consider. Well, really, two things: are you in dollars, euros, or yen? So what’s your unit of measure? And then the other thing to consider is that in some organizations, the financial numbers are all kind of like blue dollars, where it’s not real money but an internal accounting system where you might call them blue dollars or greenbacks or whatever fictional name you assign to the units of measure.

So you’re not actually spending money on labor, but you pay other departments out of your departmental budget. So what’s the unit of measure and how does that work? Organizational procedure links This is crucial, especially in a large company or organisation where certain internal processes as part of enterprise environmental factors of how you purchase, deal with procurement, and purchase goods and services are in place. And then, as I was talking about a moment ago, do you have internal billbacks where your department does work for other departments, and those other departments are billed, and so they pay your department for those services, not you personally for those services? And then how do you get people on and off your project? How do you deal with communications? Is there a quality control department? Is there a risk management department?

So, the larger the organization, the more likely you’ll have more organisational procedure links where you’re dealing with your company’s procedures to complete your project. When we discussed the level of precision, I mentioned the control thresholds and the range of variance. So a control threshold is: how will you respond when dollars or the cost of work exceed that range of variance? So you could say that the maximum variance for our project is $3,000 So if it gets to $3,001, what’s your control threshold? How do you respond when that variance has increased? So, do you need to create an exceptions report?

Do you have to take some other things off the table now because you can’t afford them? Do you have to go and explain to the stakeholders why the costs have increased? So that’s all about the control thresholds. What is that threshold? What are you going to do beyond this point? Then you have an issue with your project. What are the rules of performance measurement? How do you know you’re performing well on cost? Is it that range of variance, or are you doing something like a key performance indicator? What is the cost plus time to obtain X number of deliverables? Or you’re doing an earn value management approach, which we’ll be talking about in just a little bit, and then reporting formats. How do you report on the cost of goods and services? How do you report on performance?

So what is your reporting format? And then process descriptions: what are the processes that you do in your organization? We’re talking about more than just estimating and budgeting project costs; we’re talking about controlling the processes that you must follow in order to get things done in your organization. So that ties back into our organizational-procedure links and our level of precision in units of measure, things like that. So what’s unique?

All of these are enterprise environmental factors. So that’s the cost management plan. It’s a critical plan in your project. Cost always seems to be something that management is interested in, even more so than time. So I want to pay attention to the cost management plan. It predicts how we will do cost estimating, how the budget will be managed, and how you will control costs. Those three things that happen are the other three processes in this lecture or in this section. All right, good job. Let’s keep moving forward. There is a lot of information to discuss in this section on cost management.