Points to Remember: Project Cost Management

Analogous Estimating is sometimes called “Top-Down Estimating”. Take a minute and think about why it would be called “top-down.” When you’re doing bottomup estimating, first you break it down into pieces, estimate each piece, and add them up. Analogous estimation is the opposite: you start with the whole project (without breaking it up at all), find other projects that were like it, and use those projects to come up with a new estimate.

Cost of Quality is how much money it takes to do the project right.

Benefit cost ratio (BCR): This is the amount of money a project is going to make versus how much it will cost to build it. Generally, if the benefit is higher than the cost, the project is a good investment.

Net present value (NPV): This is the actual value at a given time of the project minus all of the costs associated with it. This includes the time it takes to build it and labor as well as materials. People calculate this number to see if it’s worth doing a project. Money you’ll get in three years isn’t worth as much to you as money you’re getting today. NPV takes the “time value” of money into consideration, so you can pick the project with the best value in today’s dollars.

Just because you plan out a budget in your Cost Performance Baseline, that doesn’t mean your project is 100% guaranteed to fall inside that budget. It’s common for a company to have a standard policy for keeping a management reserve to cover unexpected, unplanned costs. When you need to get your project funded, that funding has to cover both the budget in your Cost Performance Baseline and the management reserve.

Parametric Estimation is used in Estimate Costs and Determine Budget.

Cost Aggregation is rolling up costs from the work package level to the control account level so that the numbers can be followed down through the WBS hierarchy.

Control Accounts are highlevel WBS items that are used to track cost estimates. They do not represent activities or work packages. They represent the cost of the work packages and activities that appear under them in the WBS

The main output of Estimate Costs is the Activity Cost Estimate and the Basis of Cost Estimate. The main output of Determine Budget is the Cost Performance Baseline and Project Funding Requirements.

You will get questions on the exam asking you to select between projects using Net Present Value (NPV) or Benefit Cost Ratio (BCR). Always choose the project with the biggest NPV or BCR!

Lifecycle Costing means estimating the money it will take to support your product or service when it has been released.

Rough Order of Magnitude Estimation is estimating with very little accuracy at the beginning of a project and then refining the estimate over time. It’s got a range of –50% to +50%.

If the SPI is below 1, then your project is behind schedule. But if you see a CPI under 1, your project is over budget! SPI and CPI are just ratios! If SPI is really close to 1, then SV will be really close to zero—and it means that my project is going as planned! And when your CPI is really close to 1, it means that every dollar your sponsor’s spending on the project is earning just about a dollar in value.


Points to Remember - Other Topics:

Introduction to Projects & Project Management
Relationship Between Knowledge Areas & Process Groups
Project Integration Management
Project Scope Management
Project Time Management
Project Quality Management
Human Resource Management
Project Communication Management
Project Risk Management
Project Procurement Management
Ethics & Professional Responsibility

Points to Remember: Introduction to Projects & Project Management

Introduction to Projects & Project Management

1. Knowledge, performance, and personal skills are the three areas that project managers focus on to get better at their jobs.
2. When you’re talking about things like the people in your organization, the market you compete in, your company’s risk tolerance, and standards that your company needs to meet (like government-imposed standards for any contractor bidding on a government project), you’re talking about Enterprise Environmental Factors.
3. A program is a collection of projects that should be managed together in order to achieve a specific goal or benefit to the company.
4. A portfolio is a collection of projects or programs.
5. A project gathers a team together to do work that’s temporary, creates a unique result, and is progressively elaborated.
6. An operation (or process) is work that’s done in a way that’s repeatable and ongoing, but is not a project.

Organizational Structure

1. Functional managers have all the power in a functional organization. Project managers have the power in a projectized organization.
2. If a question on the exam doesn’t state an organization type, assume it’s referring to a matrix organization. That means the PM is responsible for making budgets, assigning tasks to resources, and resolving conflicts.
3. Project coordinators and expediters don’t exist in a projectized organization.
4. A project expediter keeps track of project status only.
5. A project coordinator has some authority, and usually reports to someone higher up in the company. Neither role has as much power or authority as a real project manager, even though an expediter or coordinator may have “Project Manager” written on their business cards.

Project Management Knowledge Areas

There are a total of 9 Knowledge Areas as per the PMBOK Guide. They are:

Integration Management: Coordinating all of the work so that it happens correctly. Making sure changes are approved before they happen.
Scope Management: Figuring out what work needs to be done for your project. Making sure your end product has everything you said it would.
Time Management: Figuring out the time it will take to do your work and the order you need to do it in. Tracking your schedule and making sure everything gets done on time.
Quality Management: Making sure you work as efficiently as you can and don’t add defects into the product.
Cost Management: Knowing how much you’re able to invest in the project and making sure you spend it right.
Human Resource Management: Getting the people to work on the team and helping them stay motivated. Rewarding them for a job well done and resolving conflicts that come up
Communications Management: Making sure that everybody knows what they need to know to do their job right. Tracking how people talk to each other and dealing with misunderstandings or miscommunications if they happen.
Procurement Management: Finding contractors to help you do the work. Setting the ground rules for their relationships with your company.
Risk Management: Figuring out how to protect your project from anything that could happen to it. Dealing with the unexpected when it does happen.

Points to Remember - Other Topics:

Relationship Between Knowledge Areas & Process Groups
Project Integration Management
Project Scope Management
Project Time Management
Project Cost Management
Project Quality Management
Human Resource Management
Project Communication Management
Project Risk Management
Project Procurement Management
Ethics & Professional Responsibility

Chapter 41: Introduction to Project Resource Management

Well, as part of project planning we have completed planning for the projects schedule and project communication. The next step would be to start planning for project resources. After all, you need someone to work on the project right? This is what we are going to learn in this and the next few chapters.

So, lets get started!!!

What are Project Resources?

Project Resources are entities that you need to execute a project. You need a team to work on the project (human resources), the team needs computers and other set up (infrastructure resources), the team needs to be paid (cost resource) and so on…

So, the core question that will be answered at the end of this series of chapters is: How do you plan for the project resources? This issue breaks down into three major areas:
• Human resource planning
• Cost planning and
• Procurement planning.

Planning for Resources

As you might remember, resource requirements are estimated by using the Estimate Activity Resources process, and the schedule is developed by using the Develop Schedule process. The activity resource requirements estimated this way are used to develop the human resource plan for the project. The human resource plan and the project schedule, in turn, are used to make cost estimates for activities, which are aggregated to determine the project budget.
Look at the picture below to understand the whole idea…

The direction of the arrow heads indicates flow of information from one activity to another.

Note: Don't worry too much if you can’t understand this picture. We will be covering all the steps involved in planning for project resources in detail.

The approved budget with a timeline assigned to it is called the cost baseline, against which the project performance is measured. This baseline is also used to plan for procurements i.e., purchases and acquisitions that are needed to complete the project but cannot be produced by the project team.

While developing the project schedule, the availability of resources required to perform the schedule activities is an obvious assumption. An important category of resources is human resources—for example, a computer programmer who will write a computer program. You need to plan for these resources.

We will be covering cost planning, human resource planning and procurement planning in detail in the forthcoming chapters…

Prev: Important Terms - Project Schedule & Communication Management

Next: Developing the Human Resource Plan

Chapter 7: Project Management Knowledge Areas

In the previous chapter, we saw the project lifecycle in detail. In this chapter, we are going to take a look at the Project Management Knowledge Areas.

So, lets get started!!!

Project Management Knowledge Areas

Managing projects requires applying knowledge, skills, and tools and techniques to project activities in order to meet the project objectives. You do this by performing some processes at various stages of the project, as discussed in the previous chapter. That means processes are part of the knowledge required to manage projects. Each aspect of a project is managed by using the corresponding knowledge area. For example, each project has a scope that needs to be managed, and the knowledge required to manage scope is in the knowledge area called project scope management. To perform the project work within the project scope, you need human resources, which need to be managed; the knowledge used to manage human resources is called human resource management.

I guess, by now you have a fair idea of where we are getting to.

Each process belongs to one of the nine knowledge areas:

1. Scope Management
2. Time Management
3. Cost Management
4. Human Resource Management
5. Procurement Management
6. Risk Management
7. Quality Management
8. Integration Management
9. Communications Management
10. Stakeholder Management (This Knowledge Area was introduced in PMBOK 5th Edition)

Each knowledge area has its own place in the project lifecycle and they are all equally important from a project managers point of view. In practical experience you might fine one or more areas to have a greater impact on the outcome of the project, but nonetheless they are all important and play a vital role in the success or failure of a project.

Let us now look at each of these knowledge areas in detail…

Project scope management

The primary purpose of project scope management is to ensure that all the required work and only the required work is performed to complete the project successfully. This is accomplished by defining and controlling what is included in the project and what is not.

Obviously, these activities are performed by using the corresponding processes. So, project scope management, in part, defines the work required to complete the project. It’s a finite amount of work and will require a finite amount of time and resources. These need to be managed as well. The other knowledge areas cover them.

Project time management

The primary purpose of project time management is to develop and control the project schedule. Any project has a timeline by which it is expected to be completed and a well managed project is expected to complete by the set timelines.

Trivia:
Even though project time management takes care of all requisite parameters to manage the timelines of a project effectively, in reality you might find that the project managers are running around like headless chickens trying to get the project completed on time. This usually happens almost always. As an efficient manager, we should ensure that we don't become one of those headless chickens.

Project cost management

The primary goal of project cost management is to estimate the cost and to complete the project within the approved budget. This is one of the important activities because our bosses wouldn't approve if we exceed our approved budgets and it might have severe repercussions. Not to mention, finishing a project within budget with money to spare will always help you during your own appraisal!


The resources needed to complete the project activities include human resources, which need to be managed as well.

Project human resource management

The primary purpose of project human resource management is to obtain, develop, and manage the project team that will perform the actual project work.


There will be situations in which your organization does not have the expertise to perform certain schedule activities in-house. For this or for several other reasons, you might want to acquire some items or services from a vendor Ex: Servers from IBM. This kind of acquisition is called procurement, which also needs to be managed.

Project procurement management

The primary purpose of procurement management is to manage acquiring products (that is, products, services, or results) from outside the project team in order to complete the project. The external vendor who offers the service is called the seller.

Project Risk Management:

Any work, that is done will always have some uncertainties that give rise to project risks, which need to be managed. A project risk is an event that, if it occurs, has a positive or negative effect on meeting the project objectives. The primary purpose of project risk management is to identify the risks and respond to them should they occur.

The goal of risk management is to help meet the project objectives and to help avoid/handle situations that might compromise the project schedule or outcome.

Project quality management

Project quality is defined as the degree to which a project satisfies its objectives and requirements. For example, a high-quality project is a project that is completed on time and with all the work in the project scope completed within the planned budget.

Project integration management

The project is initiated, planned, and executed in pieces, and all those pieces are related to each other and need to come together. That is where integration management comes in. For example, integrating different subsidiary plans into the project management plan needs to be managed. Project integration management includes developing the project charter, developing the project management plan, directing and managing project execution, monitoring and controlling project work, performing integrated change control, and closing the project or a phase of a project.

While managing all the aspects of the project, you as the project manager, will need to coordinate different activities and groups, and for that you need to communicate.

Project communication management

It is absolutely mandatory for the success of the project that the project information is generated and distributed in a timely fashion and to all the stakeholders involved. Experienced managers would say communication is the most important aspect of a project and the most important skill a project manager must have. Without any doubt, communication management is certainly a critical component of project management and a common thread that runs through the project lifecycle.

Project Stakeholders Management

As of the PMBOK 4th Edition there was no such knowledge area. In fact, processes related to stakeholders were actually part of Communications Management. Considering how critical managing stakeholders is, to the success of a project, PMBOK 5th edition included a separate knowledge area for the same. Anyone who is involved with or impacted by a project is a stakeholder and this knowledge area deals with how the project manager is supposed to manage them.

As you can see, managing a project involves performing a set of processes at the various stages of the project. Accordingly, processes are grouped corresponding to these stages and the groups are called process groups.

Processes are part of the knowledge required to manage projects. Each of these processes belongs to one of the nine knowledge areas identified in the PMBOK Guide. So a process has a dual membership—one in a process group, indicating at what stage of the project the process is performed, and the other in a knowledge area, indicating what aspect of the project is managed by using the process.

Below is a table that relates these two aspects:

Now that we know all the processes involved in project management, we will next take a look at the Project Stakeholders.

Previous: Project Lifecycle

Next: Project Stakeholders