Cost Formulas & Variables: Important Formulas and Variables in PMP

Your preparations for the PMP credential examination require frequent use of many critical variables and formulas. As in the case of other aspirants, your points of concern are obviously related to how to use, where to use, how to compute, and most importantly, how to derive correct values from these formulas—right?
As incorrect ways of memorizing variables/formulas often bring forth the wrong results, a standard process of handling them becomes a necessity. Based on Chapter 7 of PMBOK, what follows below is an insight into the easy understanding of some important pointers that help you in cracking this examination.
Important Formulas--Cost Management

• Cost Variance (CV) = Earned Value (EV) – Actual Cost (AC)


• Cost Performance Index (CPI) = EV / AC


• Schedule Variance (SV) = Earned Value (EV) – Planned Value (PV)


• Schedule Performance Index (SPI) = EV / PV

Glossary Terms

• Sunk cost – these are the costs that have already taken place in the past and are not capable of being recovered.


• Opportunity cost – this is typically the difference in the value attained by choosing one path and 100percentof the value of its next best alternative.


• Value engineering/ analysis– relates the reduction in costs, without affecting the project scope.


• Cost Benefit Analysis (CBA) / Benefit Cost Analysis (BCA) – determines feasibility as well as the other variables of BCR.


• Payback Period – the total length of time required for recovering the investment.


• (Gain-Cost)/Cost = Return on Investment (ROI) less the profitability/ effectiveness of investment.


• Time Value of Money – Present Value (PV) = value / (1+interest rate)year, Future Value (FV) = value (1+interest rate)* year.


• Net Present Value (NPV) = PV of cash inflows – PV of cash outflows (cost).


• Funding for project –relates to funding with equity, self-fund, funding with debts.


• Discount rate – this the rate used for calculating the present value of projected yearly benefits/ costs.

ITTOs-- Project Cost Management

Plan Cost Management	Project Management Plan Project Charter Enterprise Environment Factors Organization Process Assets	Expert Judgment Analytical Techniques Meetingsess Assets	Cost Management Plan
Estimate Costs	Cost Management Plan Human Resource Management Plan Scope Baseline Project Schedule Risk Register Enterprise Environment Factors Organization Process Assets	Expert Judgment Analogous Estimating Parametric Estimating Three Point Estimates Reserve Analysis Cost of Quality Project Management Software Vendor Bid Analysis Group Decision Making Techniques	Activity Cost Estimates Basis of Estimates Project Document Updates
Determine Budget	Cost Management Plan Scope Baseline Activity Cost Estimates Basis of Estimates Project Schedule Resource Calendars Risk Register Agreements Organization Process Assets	Cost Aggregation Reserve Analysis Historical Relationships Funding Limit Reconciliation Expert Judgmentents Organization Process Assets	Cost Baseline Project Funding Requirements Project Document Updates
Control Costs	Project Management Plan Project Funding Requirements Work Performance Data Organization Process Assetstml> ents Organization Process Assets	Earned Value Management Forecasting To Complete Performance Index (TCPI) Performance Reviews Project Management Software Reserve Analysiss	Cost Forecasts Change Requests Work Performance Info Organization Process Assets Updates PM Plan Updates Project Document Updates

Plan Cost Management

1. The Cost Management Plan deals with:

• Level of accuracy / level of precision


• Unit of measurement


• WBS procedure links with respect to control account (CA)


• Control threshold


• Earned value rules linked with reporting, funding, performance, and processes

2. Life cycle costing = total cost of ownership (Running / maintenance cost, production cost, etc.)

Estimate Costs

• Quite similar to the variables of Estimate Activity Resources


• Determines ways of reducing costs


• Helps SME deliver more accurate estimates


• Is based on WBS

Cost Types are:

• Variable costs – the costs that change in accordance with the amount of work on hand, for instance, hourly consultants


• Fixed costs – the costs that are fixed and constant in nature, e.g. equipment leases


• Direct costs – these costs are directly attributed to a specific project


• Indirect costs – refer to shared costs such as AC, lighting, etc.

Cost Estimate Tools

• Analogous estimating tools (Top Down Estimate) – they compare to similar projects that have been taken up in the past (rule of thumb/ an estimating heuristic)


• Parametric estimating tools– uses parameters/ repetitive units for identical work


• Bottom-up estimating tools– give detailed estimates for individual activities from historical data, is more time-consuming but accurate.


• Activity Cost Estimates usually includes indirect costs/ contingency reserves


• Are usually present in a wide range of values


• Basis of Estimates – gives a detailed analysis about how cost estimates were derived (constraints, assumptions, confidence levels of final estimate, possible range (+/-15%) and so forth.)

Determine Budget

• Budget is related to when and how to spend money.


• Historical Relationships – parametric/ analogous estimations.


• Reserve Analysis –Contingency Reserve (identifiable risks) and Management Reserve (unknown variables); it is not included in the calculation of total earned value management.


• Funding Limit Reconciliation – it addresses the variance between the funding limits (monthly/ yearly limit) as well as planned expenditures; it may necessitate work rescheduling to the assessed levels of the rate of expenditure.


• Value Engineering – important for improving quality/shorten schedules without affecting the overall scope.


• Project Budget = Management Reserve+ Cost baseline (with time-phased budgets that have been approved).


• When the management reserve is utilized during project execution, it becomes important to add the amount to cost baselines.


• S-curve:the total project expenditure is mapped across the project lifecycle.

Control Costs
These variables check against project funding requirements and informs stakeholders of approved changes / their costs

• Earned Value Calculation


• Index > 1: ahead of schedule/ under budget


• Index < 1: behind schedule/ over budget

Estimate at Complete:

• New estimate required (when original flawed)


• No BAC variance


• CPI and sub-standard costs/schedules will continue


• TCPI


• Not enough funding remains (project is over budget)


• More funds are available than needed (project is under budget)

Earned Value Accrual

1. Discrete Efforts – it describes the activities that are likely to be planned/ measured for all outputs, including Fixed Formula, Percentage Complete, Weighted Milestone, Physical Measurement and so forth.


2. Apportioned Efforts – describes the work that boasts of a direct/supporting relationship towards discrete work—testing or PM activities, which are calculated as a percentage of discrete work.


3. Level of Efforts (LOE) – describes the activities without deliverables, for instance, assigned earned value (scheduled), troubleshooting, and without schedule variance; but these may have a small percentage of cost variance.

Variance Analysis – allows for checks against baseline for all kinds of variance.

• SPI, at the end of a project, must have a value of 1 and should be complemented with the Critical Path Method for more accurate results.

All the best!
Author : Uma Daga