Chapter 41: Summary - Project Management Knowledge Areas

Not all project management knowledge areas apply to all projects or project phases. Knowledge areas can interact and overlap.

All the 42 project management processes in the PMBOK are part of one of the nine project management knowledge areas:
1. Integration Management
2. Scope Management
3. Time Management
4. Cost Management
5. Quality Management
6. Human resource Management
7. Communications Management
8. Risk Management
9. Procurement Management

Project Integration Management

The processes that are part of Project Integration Management are:
1. Develop project charter
2. Develop project management plan
3. Direct and manage project execution
4. Monitor and control project work
5. Perform integrate change control
6. Close project or phase

Project Scope Management

The five processes that are part of Project Scope Management are:
1. Collect requirements
2. Define scope
3. Create WBS
4. Verify scope
5. Control scope

Project Time Management

The six processes that are part of Project Time Management are:
1. Define activities
2. Sequence activities
3. Estimate activity resources
4. Estimate activity durations
5. Develop schedule
6. Control schedule

Project Cost Management

The three processes that are part of Project Cost Management are:
1. Estimate costs
2. Determine budget
3. Control costs

Project Quality Management

The three processes that are part of Project Quality Management are
1. Plan quality
2. Perform quality assurance
3. Perform quality control

Project Human Resource Management

The four processes that are part of Project Human Resource Management are
1. Develop human resource plan
2. Acquire project team
3. Develop project team
4. Manage project team

Project Communication Management

The five processes that are part of Project Communication Management are
1. Identify stakeholders
2. Plan communications
3. Distribute information
4. Manage stakeholder expectations
5. Report performance

Project Risk Management

The six processes that are part of Project Risk Management are:
1. Plan risk management
2. Identify risks
3. Perform qualitative risk analysis
4. Perform quantitative risk analysis
5. Plan risk responses
6. Monitor and control risks

Project Procurement Management

The four processes that are part of Project Procurement Management are
1. Plan procurements
2. Conduct procurements
3. Administer procurements
4. Close procurements

Prev: Chapter 40

Next: Chapter 42

Chapter 28: Cost Management during Monitoring & Controlling the Project

Aim: To understand the Control Costs process

The control costs process helps the project manager ensure that the work is occurring within the project budget and identifies any variances early in the process.

The table below shows the inputs, tools and techniques, and outputs for the control costs process.

Control Costs
Inputs	Tools & Techniques	Outputs
Project management plan Project funding requirements Work performance information Organizational process assets	Earned value management Forecasting To-complete performance index Performance reviews Variance analysis Project management software	Work performance measurements Budget forecasts Organizational process assets updates Change requests Project management plan updates Project document updates

The control costs process identifies any areas that are costing more than planned. As a project moves toward completion the value of the project’s deliverables changes. The “value” of a project at any point in time is known as its earned value. One method of comparing the earned value of a project to the budget is earned value analysis.

Exam Alert:

Do you remember Earned Value Analysis? The calculations where we calculate SPI & CPI using the EV, PV and AC. Remember??

The whole idea behind a corrective or preventive action is to help preserve the healthy execution of your project and maximize its resource utilizations.

Let us Recap the Terms & Formulae used during Earned Value Analysis:
Terms:

• BAC – Budget At Completion – This is the amount that you planned that your project will use at completion
• EV – Earned Value – The value (in monetary terms) your project has earned so far
• PV – Planned Value – The value that your project is supposed to have earned so far
• AC – Actual Cost – The Actual cost that you have spent so far
• ETC = Estimate To Complete – The amount of money you will need to complete the project
• EAC = Estimate At completion – The Amount of money you would have spent when the project completes
• TCPI – To Complete Performance Index – The Cost Performance Index that you must attain in order to finish the project as per the planned amounts

Formulae:

• SPI – Schedule Performance Index = EV / PV
• CPI – Cost Performance Index = EV / AC
• SV – Schedule Variance = EV – PV
• CV – Cost Variance = EV – AC
• ETC = EAC – AC
• EAC = BAC / CPI
• TCPI = BAC – EV / BAC – AC or
• TCPI = BAC – EV / EAC – AC

To know more about the Control Costs process Click Here

To know more about the Earned Value Measurements with examples Click Here

Preb: Chapter 27

Next: Chapter 29

Chapter 2: Project Management Knowledge Areas

Aim: To understand the Project Management Knowledge Areas and the Process Groups

The PMBOK organizes all the activities that define a project’s life cycle into 42 processes. These processes are grouped to form nine knowledge areas. It is extremely important to have a good understanding of each of the project processes and how they relate to one another.

We will be taking a detailed look at each of these processes & knowledge areas in the subsequent chapters. Below is the list of 9 Knowledge Areas and the 42 processes.

Knowledge Area	Description	Processes Covered by the Knowledge Area
Project Integration Management	Processes and activities that pull the various elements of project management together, including developing plans, managing project execution, monitoring work and changes, and closing the project.	1. Develop Project Charter 2. Develop Project Management Plan 3. Direct & Manage Project Execution 4. Monitor & Control Project work 5. Perform Integrated Change Control 6. Close Project or Phase
Project Scope Management	Processes that ensure the project includes the work required to successfully complete the project, and no more. This includes scope planning, definition, verification, and control. This area also includes the work breakdown structure creation.	1. Collect Requirements 2. Define Scope 3. Create WBS 4. Verify Scope 5. Control Scope
Project Time Management	Processes that ensure the project completes in a timely manner. Activity sequencing and scheduling activities occur in this area.	1. Define Activities 2. Sequence Activities 3. Estimate Activity Resources 4. Estimate Activity Durations 5. Develop Schedule 6. Control Schedule
Project Cost Management	Processes that ensure the project completes within the approved budget. Basically, any cost management activity goes here.	1. Estimate Cost 2. Determine Budget 3. Control Costs
Project Quality Management	Processes that ensure the project will meet its objectives. This area includes quality planning, assurance, and control.	1. Plan Quality 2. Perform Quality Assurance 3. Perform Quality Control
Project Human Resource Management	Processes that organize and manage the project team.	1. Develop Human Resource Plan 2. Acquire Project Team 3. Develop Project Team 4. Manage Project Team
Project Communications Management	Processes that specify how and when team members communicate and share information with one another and others not on the team.	1. Identify Stakeholders 2. Plan Communications 3. Distribute Information 4. Manage Stakeholder Expectations 5. Report Performance
Project Risk Management	Processes that conduct risk management activities for the project. These activities include risk analysis, response planning, monitoring, and control.	1. Plan Risk Management 2. Identify Risks 3. Perform Qualitative Risk Analysis 4. Perform Quantitative Risk Analysis 5. Plan Risk Response 6. Monitor & Control Risks
Project Procurement Management	Processes that manage the acquisition of products and services for the project, along with seller and contract management.	1. Plan Procurements 2. Conduct Procurements 3. Administer Procurements 4. Close Procurements

You can learn more about the Project Management Knowledge Areas by Clicking Here

Prev: Chapter 1

Next: Chapter 3

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

Chapter 43: Estimating Costs and Determining Budgets

In the previous chapter we learnt how to create the project human resource plan. To get resources you need to spend money (Cost) and you cant spend an infinite amount. Every project has certain limits on the amount of money you can spend (Budget). In this chapter, we are going to learn about estimating the costs and determining the budget involved in a project.

So, lets get started!!!

Difference Between Cost & Budget:

Many people confuse the terms cost & budget and even use them interchangeably. Unfortunately they are both not the same. So, the first thing we need to do is, understand clearly the difference between cost and budget.

Cost is the value of the inputs that have been (or will be) used up to perform a task or to produce an item: product, service, or result. This value is usually measured in units of money. For example, you paid two programmers Rs. 5000/- each for developing a software program, and you paid Rs.1000/- to a tester to test the program. So, the cost for the task of developing and testing the software program is Rs. 11,000/-. You can add the costs of components of a system, and the sum will represent the cost of the system, but it’s still a cost and not a budget.
Budget is an aggregated cost with a timeline. You aggregate the costs of all the resources needed to perform the project and put a timeline on it: the availability of funds over time. That is called a budget.

Look at the image below:

Cost management consists of estimating project costs, determining budget from the cost estimates, and controlling the cost while the project is being executed. This is just a high level depiction of cost management and we will cover the details now.

Estimating Project Costs

Estimating project cost means developing an estimate for the monetary resources needed to complete the project work; that is, activities. These estimates are based on the information available at a given time. The estimates in the beginning are less accurate; for example, their accuracy may be only as good as + or - 50 percent. For example, if you say the cost will be $50,000, it could be anywhere between $25,000 and $75,000. As the project moves along and more information becomes available, the cost estimates can be improved to get better estimates.
The standard process used to estimate costs is called the Estimate Costs process. Look at the image below:

Estimating project cost means estimating the costs required to complete the project scope by executing schedule activities. Therefore, you need the scope baseline and the schedule baseline for estimating costs. Recall that the scope baseline is constituted by the scope statement, the WBS, and the WBS dictionary, and the schedule baseline is the approved project schedule. The list of items used as input to this process are:
• Human resource plan - The information in the human resource plan useful for estimating costs includes the list of roles and responsibilities, personnel rates, and recognitions and rewards.
• Project schedule - An approved project schedule will give you the information about the resources needed to complete the project work. This information is crucial to make cost estimates. As you learned in the previous chapter, activity resources are estimated by performing the Estimate Activity Resources process. Therefore, the Estimate Costs process should be closely coordinated with the Estimate Activity Resources process, which in turn depends on the Estimate Activity Durations process because activity duration is determined for the given resources.
• Scope baseline - All three components of the scope baseline; scope statement, WBS, and WBS dictionary are useful in estimating the project cost. The scope statement will provide the cost-relevant information, such as project and product acceptance criteria, assumptions and constraints, product description, key deliverables, and project boundaries around the scope.
• Risk register - Both kinds of risks—threats and opportunities have an impact on the cost in the form of risk mitigation costs and revenues or savings from the opportunities.
• Enterprise environmental factors - Enterprise environmental factors relevant to estimating costs include market conditions and published commercial information that will provide the cost of resources, including human resources, materials, and equipment. This will also provide the information related to the availability of products and services and their cost and rates. Supply and demand conditions can also influence the project cost.
• Organizational process assets - This includes the organization’s policies regarding cost estimates, cost estimating templates, and information from previous projects, including lessons learned.

Tools & Techniques used in Cost Estimating

Some tools and techniques that can be used in cost estimating and budgeting are:
Analogous estimation - Analogous cost estimation is a technique that uses cost-related variables, such as rate, cost of a component, cost of an activity from similar tasks and activities in previous projects, or cost of a similar project from the past, to measure the same variable in the current project. This technique is useful when very limited component information is available, especially in the beginning of a project, and is usually used for estimating the gross values and not the detailed component-based values. It’s generally less costly and less time consuming than other techniques, but it also is less accurate. Its accuracy and reliability improve if the person making the estimate is an expert and the components or activities being compared are actually similar.

Parametric estimation - This is a technique that uses some parameters and statistical relationships among them to make the estimate. For example, if the unit cost is known, say from historical data, the cost of the whole package containing a number of units can be calculated. This technique can generate quite accurate results depending on the accuracy of the quantity of resources and other data that goes into the estimation.

Bottom-up estimation - This technique involves estimating the cost of the parts of a component and then aggregating the cost of those parts to calculate the cost of the whole component. This technique can generate accurate results when you can generally make a better estimate of a part than the whole, which is usually the case when enough information is available.

Contingency reserve analysis - The following two problems are associated with the estimates:
• Estimates are approximations, and approximations imply uncertainty, which means risk.
• Some stakeholders will always push the envelope on the project scope, and each organization has some tolerance for overrunning the objectives. This will mean more cost.

You will need some funds to deal with both of these situations. What comes to your rescue here is called contingency reserve. The contingency reserve, in general, is an amount of resource (funds or time) allocated in addition to the calculated estimates to reduce the risk arising from various sources—for example, from the overruns of project objectives to a level acceptable to the performing organization. In other words, the contingency reserves are the funds reserved to deal with events that are anticipated but not certain. Contingency reserves can be used at the discretion of the project manager. The overall cost estimate should include the contingency reserves.

Vendor bid analysis - Bids from qualified vendors on parts of the project or even the whole project can help in estimating the project cost.

Cost of quality - Cost of quality, should also be considered when making cost estimates. Don't worry about Cost of quality just yet. We will cover it in one of the subsequent chapters.
Three-point estimates - Three-point estimates, discussed in the previous chapter for duration estimates, can also be applied in the same way to cost estimates.

Trivia:
Note that the accuracy of cost estimates depends on many other estimates, such as activity duration estimates and resource requirement estimates, which go into developing the schedule baseline used for making cost estimates. It is important to keep this dependency in mind just in case you need to change any of these estimates.

Output of Estimate Costs Process

The output of the Estimate Costs process consists of:
Activity cost estimates - These are the quantitative estimates of various costs required to complete the project work. Depending on the project and the stage of the project, cost estimates may be documented in summary form or in detail. These estimates include costs for all resources needed to complete the project work, including equipment, facilities, information technology, labor directly applied to the project work, material, and services. Indirect costs and special categories, such as allowances and contingency reserves, must also be included.

Estimate bases - It’s important to document what the bases of the cost estimates were. These may highly depend on the application area of the project. At a higher level, the following elements must be included in the documentation:

• Assumptions made in making the estimates; for example, the labor rate and where this data came from.
• Constraints that affected the estimates; for example, a milestone must be met by a certain date.
• The methods used to develop the estimate; for example, a three-point estimate.
• The uncertainty, such as +10%, and the confidence level must be assigned to an estimate.

In a nutshell, the outcome of estimating costs will include a cost estimate for each project activity and the basis for that estimate, which can be used to determine the project budget.

Determining Project Budget

Determining the project budget is the process of aggregating the cost estimates for all project activities and assigning a timeline to them. Cost aggregation is the technique used to calculate the cost of a whole by summing up the costs of the parts of which the whole is made. You can use the bottom-up estimation technique to aggregate the costs of all the components and activities to calculate the total cost of the project. The timeline assigned to this cost will be important to reconcile the expenditure with the funding limits. The reconciliation may require rescheduling some activities.

The budget is determined by using the Determine Budget process. Look at the picture below:

Most of the items in the input to this process are already described in this chapter. Organizational process assets may include organizational policies and tools for determining the budget. The reserve analysis at budget level includes management reserve in addition to contingency reserve, and you must understand the difference between the two. Contingency reserves are the funds that can be used to deal with the unplanned events that can potentially transpire in case one or more identified risks occur, whereas management reserves are the funds that can be used in case of yet unplanned but future changes in some aspects of the project, such as the project scope.

The approved budget that includes the aggregated cost with timeline is called the cost baseline. The cost performance of the project is monitored, measured, and controlled against this baseline. This is why it’s also called the cost performance baseline. Funding requirements for the project are derived from the cost baseline and the reserve analysis.

Do not leave out the cost of the internal employees of the organization who will work on the project. They are not free, for two reasons: The organization pays for them, and they do not have infinite numbers of hours to put into the project. Their cost to the project will be determined just like any other project role based on the hours of work they will put into the project.

In the process of determining the budget, you may need to update the project schedule, cost estimates, and the risk register.

Your organization may not have the resources to complete all parts of the project. For those parts of the project, you will need to use what is called procurement.

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Next: Procuring the Project Resources