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Knowledge Area 5 Project Cost Management

  • Resource planning
  • Cost estimating
  • Cost budgeting
  • Cost control

Definitive (+- 5%)
Capital Cost (+- 10% - 15%)
Appropriation (+- 15% - 25%)
Feasibility (+- 25% - 35 %)
Order of Magnitude (> +- 35%)

Chart of account describes the code structure of performing organization to report financial in to its general ledgers.

Larger projects may have multiple cost baselines to measure different aspects of cost performance.

E.G.A spending plan or cash flow forecast is a cost baseline for measuring disbursements.

  • Net present value (NPV) - the bigger, the better.
  • Because money values decrease every year, PV = FV/ (1 + r) n [PV = Present value. FV = Future value. r = discount rate. n = years]
  • Internal Rate of Return (IRR) Discount rate on an investment which makes present value of cash inflows equal present value of cash outflows. The bigger, the better.
  • Select a project with lower payback period.
  • For 2 projects having same investment, select a project with lower Life Cycle Cost.
  • Benefit Cost Ratio (BCR) - Select a project with the greater BCR
  • Project A has as NPV of $ 1,000. Project B has a NPV of $ 800. If project A is selected, NPV is $ 1,000. The opportunity cost of Project A = $ 800
  • Project A had initial budget of $ 1,000 out of which $ 800 has already been spent. To complete project A, we will need additional $ 500. Another Project B will require $ 1200 for completion. $ 800 spent in project A is sunk cost hence should be ignored. Hence, we should select project A

Depreciation is the decrease in value of an asset over a period of time for accounting and tax purposes.
  • Straight line
  • Accelerated
    • Double Declining Balance
    • Sum of the Year Digits

Present Value (PV), Earned Value (EV), Actual Cost (AC), Schedule Variance (SV) = EV - PV, Cost Variance (CV) = EV - AC, SPI = EV/PV, CPI = EV/AC

Positive Variances (e.g. SV, CV) are good
All ratios greater than 1 (e.g. CPI, SPI) are good

EAC (Estimate at Complete)
  • Forecast of most likely total project costs based on project performance
  • Original Estimating Assumptions no longer Valid > AC + ETC
  • Current Variances are atypical; similar variances will not occur in the future > AC + BAC-EV
  • Current Variances are typical of future Variances > AC + (BAC-EV)/CPI
BAC (Budget at Completion )
  • Budget for the whole project > EAC * CPI

ETC (Estimate to Complete )
  • From this point, how much time is required to complete the project > EAC-AC

VAC (Variance at Completion )
  • Over or under budget BAC EAC
Life cycle costing together with Value Engineering helps to reduce cost and time, improve quality and performance and optimize decision making.

A value adding change (e.g. an environmental remediation project is able to reduce the costs by taking advantage of technology that was not available when the scope was originally defined).

--disclaimer--
This documentation is personal study notes I prepared during my PMP certification study. The source for this study notes is partially from PMBOK 2000, PMP Exam Cram 2, and www.pmstudy.com. I only take notes on knowledge areas that I thought was useful for me. In the real exam, the contents covered are much broader and more difficult than any reference books. So I think real life experience is very important.

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