Chapter Fifteen Cos
Chapter Fifteen Cos
Chapter Fifteen Cos
10th Edition
by Harold Kerzner and Frank P. Saladis
John Wiley & Sons (US). (c) 2009. Copying Prohibited.
ProjectManagementWorkbookandPMP/CAPMExamStudyGuide,10thEdition
cost-related issues from occurring or to minimize the impact on other projects or company operations
Recording and documenting all project changes that impact the cost baseline
Cost control also includes the use of effective risk management techniques that address the opportunities as well as the
potential negative events that may be experienced during project execution.
PM Knowledge Any cost control system is only as good as the original plan against which performance will be
Note
measured. Effective planning and the use of reliable sources of estimates are key factors in managing
project costs.
Glossary of termsKey Terms and Definitions to Review and Remember
A
Actual Cost (AC)
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Amount expended (in terms of direct labor or direct cost) of work that has been completed within a given time
period. Also known as ACWP, or Actual Cost of Work Performed.
Actual Cost of Work Performed (ACWP)
Amount expended (in terms of direct labor or direct cost) on work that has been completed within a given time
period. Also known as AC, or Actual Cost.
B
Baseline
The original approved plan for a project. There are three major baselines associated with a project The
Scope baseline, the Schedule baseline, and the cost baseline or project budget..
Benefit-cost ratio (BCR)
An indicator, used in the formal discipline of cost-benefit analysis, that attempts to summarize the overall value
for money of a project or proposal. A BCR is the ratio of the benefits of a project or proposal, expressed in
monetary terms, relative to its costs, also expressed in monetary terms. All benefits and costs should be
expressed in discounted present values
Budget at Completion (BAC)
The sum of the total budgets for a project. Sum of the budgets for each phase of a project.
Budgeted Cost of Work Performed (BCWP)
Amount budgeted or planned to be expended for work that has been completed. Also known as Earned Value.
Budgeted Cost of Work Scheduled (BCWS)
The budgeted amount of work that has been scheduled to be completed at the time of measurement. Also
known as Planned Value.
C
Contingency
The planned allotment of time and cost for unforeseeable elements that may be associated with project
planning. A planned reaction or response established to address an event that may or may not happen.
Corrective Action
Changes made to bring expected future performance of the project in line with the plan. Actions taken to
return project performance to the planned level or performance or to an acceptable level.
Cost Control
The process of controlling the cost of a project within a predetermined sum throughout its various stages or
phases.
Cost Performance Index
The cost efficiency ratio of earned value to actual costs. Expressed as the formula CPI = CV/BCWP or CV/EV
CPI. It is often used to predict the magnitude of a possible cost overrun using the formula BAC/CPI = projected
cost at completion.
Cost Variance
Any difference between the budgeted cost of an activity and the actual cost of that activity. In earned value
BCWP ACWP or EV AC.
E
Earned Value (EV)
A measure of the physical work accomplished considering the original approved cost estimate or authorized
budget for this work. The sum of the approved cost estimates (may include overhead allocation) for activities
(or portions of activities) completed during a given period (usually measured to a specific point in time). Also
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BCWP ACWP
or EV AC
SV or Schedule Variance =
BCWP BCWS
or EV PV
BCWP/ACWP
or EV/AC
BCWP/BCWS
or EV/PV
CV/BCWP
or CV/EV
SV/BCWS
or SV/PV
EAC or Estimate at Completion = ACWP + ETC or AC + ETC where ETC is the Estimate to Complete . This formula is
used when the original estimates appear to be questionable or are no longer relevant due to changes in the project. (ETC
refers to work that has not been performed and is therefore an estimate of cost.)
EAC = AC (cumulative) + BAC EV (cumulative where BAC is the Budget at Completion, this formula is used when the
variances experienced are atypical and similar variances are not expected to occur as work proceeds.
EAC = Ac (cumulative) + (BAC EV Cumulative) divided by CPI (Cost Performance Index). This formula is used when
variance experiences are typical and will continue to be observed as the project continues.
VAC or Variance at Completion =
BAC EAC
BAC/CPI
Cost Benefit Ratio The total saving or realized benefits in dollars (converted to present value) divided by the initial cost.
Example: A program that cost $54,000 to develop and deliver resulted in a $430,000 saving the first year. 430,000 / 54,000
= 7.96. For every dollar spent on this investment there was a return of 7.96 dollars. This would be considered to be a very
beneficial investment.
Attack of the Acronyms!
Review these acronyms and learn to recognize their meanings. These are the languageof earned value. Learn to speak
it fluently.
AC
Actual Cost
ACWP
BAC
Budget at Completion
BCWP
BCWS
CPI
CV
Cost Variance
CV %
EAC
Estimate at Completion
ETC
Estimate to Complete
EV
Earned Value
EVM
PMBOK
PV
Planned Value
SPI
SV
Schedule Variance
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SV %
VAC
Variance at Completion
WBS
PM Knowledge The WBS is a key input in the cost management process. The WBS provides a basis for estimating
Note
the resources required, the duration of each activity, and for managing changes to the project plan.
Project plans can be expected to change through the project life cycle but a well-planned project will
generally have minimal scope changes. Ensure that the entire project team is involved in the
development of the WBS. This will assist in developing a more complete project plan and improve
how the team performs together. The WBS also allows the team to determine responsibility for each
major task when it is associated with the RAMResponsibility Assignment Matrix.
Activities, Questions, and Exercises
Refer to Chapter 15 of Project Management: A Systems Approach to Planning, Scheduling, and Controlling (10th Edition)
for supporting information. Review each of the following questions or exercises and provide the answers in the space
provided.
The following questions and exercises are associated with the knowledge areas of the PMBOK Guide: Project Cost
Management and Integrated Change Control.
PM Knowledge The estimating process is the key to cost management. Make sure that your estimates have been
Note
obtained from reliable sources. Generally, estimates should be provided by the functional managers
or subject matter experts that will perform the work. Remember that estimates are actually guesses or
approximations and many factors can impact the accuracy of an estimate. Risk should be considered
when developing estimates.
1. Match Makers
A. In the left column are questions that can be answered by one and only one of the terms in the right
column. Match the right column to the terms in the left column.
a) What is the revised estimate for the final cost at the completion of the project?
_____
A. PV
_____
B. EV
C. AC
_____
D. BAC
E. SV
_____
_____
F. CV
G. EAC
f) By how much have we deviated from the schedule baseline, favorably or unfavorably?
g) By how much have we deviated from the cost baseline, favorably or unfavorably?
_____
_____
h) What is the planned cost or value of the work accomplished thus far?
_____
H. ETC
B. There are basically two types of reserves that project managers should become familiar with:
management reserves generally associated with unkown unkowns (issues that can not be anticipated
or planned for) and contingency reserves generally associated with known unknowns (issues and risks
about which some date for planning exists). For each of the two reserves in the left column, match ALL
of the appropriate possibilities from the right column that are associated with the type of reserve.
a) Management reserve:
b) Contingency reserve:
______________
______________
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Match the questions with each of the following terms. (For each of the terms below, which question will be
satisfied using the term?)
A. PV
B. EV
C. AC
D. EAC
E. ETC
F. VAC
G. SPI
H. CPI
D. Shown below are three types of performance reports. Which terms from the right column appear in each
report?
Progress report:
Status report:
__________________
__________________
A. PV
B. EV
Forecast report:
__________________
C. AC
D. EAC
E. ETC
F. SPI
G. CPI
H. SV
I. CV
Using the 50-50 Rule and the figure below, determine the value for PV, EV, and BAC.
3. EVMS Problem: A customer (homeowner) hires a contractor to tile five identical rooms in his home. The
?
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customer purchased the tiles and the contractor will be reimbursed for labor only. Because the tiles are
difficult to work with, the contractor assumes two days per room at eight hours per day and at $100 per hour.
The planned cost is $8,000 but overtime will also be paid, if necessary, at the same rate of $100 per hour.
The first room was completed in three days because of difficulty in workmanship and getting an
understanding of how to use these special tiles. This included two hours of overtime. The second room was
completed in two days. Using EVMS, what information would be presented to the homeowner at the end of
the first week?
a. PV = 5 x 800 = $4,000
b. EV = 4 x 800 = $3,200
c. AC = 42 x 100 = $4,200
d. BAC = $8,000
e. SV = EV PV = $800
f. CV = EV AC = $1,000
g. EAC = (AC/EV) x BAC = $10,500
h. VAC = BAC EAC = $2,500
i. ETC = EAC BAC = $6,300
j. Percent complete = EV/BAC = 40%
k. SPI = EV/PV = 0.8
l. CPI = EV/AC = 0.76
Now it is your turn. Having tiled the floors, you now hire a contractor to wallpaper all of the walls in each of
the five rooms. Once again, you purchase the wallpaper and will reimburse the contractor just for labor. The
contractor works at $100 per hour and estimates eight hours of work per room, for a total of five days.
At the end of the first week, working eight hours per day, the contractor completed only three rooms. The
EVMS status is:
a. PV = _____
b. EV = _____
c. AC = _____
d. BAC = _____
e. SV = _____
f. CV = _____
g. EAC = _____
h. VAC = _____
i. ETC = _____
j. Percent complete = _____
k. SPI = _____
l. CPI = _____
4. Fill in the blanks: By mistake, someone left spaces unfilled in the status report below. Please complete the ?
report by filling in the missing data.
Activity
PV
EV
AC
SV
CV
a.
100
100
150
?
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b.
200
90
c.
350
100
d.
400
300
50
e.
175
150
25
Totals
1,000
The WBS below shows the code of accounts and costs for a given project. Every place a question mark
exists, data is missing. Complete the chart.
6. Understanding S Curves
Below are three S Curves. For each of the curves, determine whether the project is under budget, over
budget, ahead of schedule, behind schedule, or cannot be determined.
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A.
B.
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C.
In the figure below, the project manager released $10 million to the functional areas to do the job. This was
the released budget but the project manager also had, as part of the contract, $6 million for an undistributed
budget that had not been planned out yet. The contract also has a $2 million profit included as well as a
management reserve of $1 million. Using the figure, answer the following questions:
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8. True-False: Beside each statement, indicate whether the statement is true or false.
_______
_______
_______
_______
_______
_______
_______
8. Excluding management reserve and undistributed budgets, the summation of all of the PV for each work
package should equal BAC.
9. Variances are usually expressed in percent as well as hours or dollars.
_______
10. Scope changes should be paid for out of the management reserve.
_______
11. Elements normally plotted in S curves are PV, EV, and AC.
_______
12. As you progress through the life cycle phases of a project, the accuracy of the estimates usually improves.
_______
_______
PMP & CAPM Exam An Earned Value Drill to help you remember those formulas!
Calculate the CV, SV, CPI, and SPI.
Case #
BCWS or PV
ACWP or AC
BCWP or EV
CV
SV
CPI
SPI
800
800
800
800
600
400
800
400
600
800
600
600
800
800
600
800
800
1,000
800
1,000
1,000
800
600
800
800
1,000
800
10
800
1,000
600
11
800
600
1,000
12
800
1,200
1,000
13
800
1,200
1,200
A. Review the Earned Value analysis for case # 3. What is your assessment of this project?
___________________________________________________________________
___________________________________________________________________
B. Review the Earned Value analysis for case study # 12. What is your assessment of this project? What
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c. EV
d. BAC
e. ETC
f. SV
g. CV
h. PV
B.
a. A, B, C, D, F, G
b. E, H
C.
a. A, B, C
b. D, E, F, G, H
D.
Progress report: A, B, C
Status report: H, I
Forecast report: D, E, F, G
2. The 5050 Rule:
PV = $34,000
EV = $33,000
BAC = $52,000
3. EVMS Problem
a. $4,000
b. $2,400
c. $4,000
d. $4,000
e. $1,600
f. $1,600
g. $6,667
h. $2,667
i. $2,667
j. 60%
k. 0.60
l. 0.60
PV
EV
AC
SV
CV
a.
100
100
150
50
b.
110
200
200
90
c.
350
250
150
100
100
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e.
400
300
350
100
50
f.
175
200
150
25
50
Totals
1,135
1,050
1,000
85
50
6. Understanding S Curves:
A. Behind schedule
B. Under budget
C. Cannot be determined
8. True-False:
1. False
2. True
3. False
4. False
5. True
6. True
7. False
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8. True
9. True
10. False
11. True
12. True
9. You Know the Drill! An Earned Value Drill to help you remember those formulas!
PMP& CAPMExam
Case #
BCWS or PV
ACWP or AC
BCWP or EV
CV
SV
CPI
SPI
800
800
800
800
600
400
200
400
.66
.50
800
400
600
200
200
1.5
.75
800
600
600
200
.75
800
800
600
200
200
.75
.75
800
800
1,000
200
200
1.25
1.25
800
1,000
1,000
200
1.25
800
600
800
200
1.33
800
1,000
800
200
.80
10
800
1,000
600
400
200
.60
.75
11
800
600
1,000
400
200
1.66
1.25
12
800
1,200
1,000
200
200
.83
1.25
13
800
1,200
1,200
0
400
1
1.50
A. Review the Earned Value analysis for case # 3. What is your assessment of this project?
Its good news and bad news. The work is being performed efficiently (under budget), but the project is behind
schedule.
B. Review the Earned Value analysis for case study # 12.
The work is being done efficiently (ahead of schedule), but there is a cost overrun. Additional resources may have
been used or overtime may have been used. There are several possible causes for this situation.
Kerzner Quick tipsfor the Project Management Institute PMP and CAPM EXAM
The subjects in this chapter are most closely associated with the areas of the PMBOK Guide: Project Cost Management,
Project Time Management, Project Scope Management.
Remember the basic earned value formulas and practice them on your actual projects. Use the technique to assess your
project. Review the technique with your project teams and explain how the process applies to your project.
Remember that PMI uses the Acronyms PV, AC, and EV. Many organizations continue to use the traditional acronyms
BCWS, ACWP, and BCWP. Learn to use them interchangeably.
Earned Value Analysis is closely connected to communications management. The information calculated through earned
value analysis is used to provide project stakeholders with useful information about a projects performance in the form of S
Curves, charts, and status reports.
Cost control is a subset of Integrated Change Control.
Cost control is a subsystem of the Management Cost and Control System (MCCS).
Cost management is associated with cost estimating, cost accounting, direct costs, indirect costs, overhead, and many
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