Chapter 3. Project Cost Control
This chapter covers the following topics:
Understand project cost control: Total project cost, expenditure tracking and reporting, burn rate, cost baseline/budget (plan versus actual), and cost control calculations (including EVM, EAC, ETC, and TCPI).
One of the main limitations for a project is the budget, established during the project’s Planning phase. The project manager is responsible for tracking the budget throughout the project. If the budget is insufficient for completing the project, the project manager will have to ask the project sponsor to provide more funds. Project managers therefore must understand and practice careful project cost control.
Note
A thorough understanding of project schedules is essential for managing project costs. Chapter 4, “Project Schedules,” provides details on planning, executing, and revising the schedule for a project.
This chapter covers the following objective for the Project+ exam:
1.4 Identify the basics of project cost control.
Note
Reminder: CompTIA might use slight variations of industry-standard terminology on the Project+ exam. For a detailed list of known vocabulary differences, see Chapter 15, “Final Preparation.”
“Do I Know This Already?” Quiz
The “Do I Know This Already?” quiz allows you to assess whether you should read this entire chapter thoroughly or jump to the “Exam Preparation Tasks” section. If you are in doubt about your answers to these questions or your own assessment of your knowledge of the topics, read the entire chapter. Table 3-1 lists major headings in this chapter and their corresponding “Do I Know This Already?” quiz questions. You can find the answers in Appendix A, “Answers to the ‘Do I Know This Already?’ Quizzes and Review Questions.”
Table 3-1 “Do I Know This Already?” Foundation Topics Section-to-Question Mapping
Foundation Topics Section |
Questions Covered in This Section |
Cost Baseline |
1 |
Total Project Cost |
2 |
Cost Control Calculations |
3–5 |
Caution
The goal of self-assessment is to gauge your mastery of the topics in this chapter. If you do not know the answer to a question or are only partially sure of the answer, you should mark that question as wrong for purposes of the self-assessment. Giving yourself credit for an answer you correctly guess skews your self-assessment results and might provide you with a false sense of security.
1. What activity involves monitoring the project’s costs and managing changes to the cost baseline?
a. cost control
b. reserve analysis
c. forecasting
d. critical path
2. What is total project cost?
a. all costs specific to a project incurred until the Monitoring and Controlling phase is complete
b. all costs specific to a project incurred until the Closing phase is complete
c. provisions in the budget to mitigate cost and/or schedule risks
d. provisions in the budget to mitigate risks
3. What is the formula for calculating planned value (PV)?
a. (% of completed work) × budget
b. EV – AC
c. (planned % complete) × budget
d. EV / AC
4. What does the formula AC + ETC calculate?
a. EAC for work, including both CPI and SPI
b. EAC for work performed at current CPI
c. EAC for work performed at current rate
d. EAC using calculated ETC
5. What does a TCPI greater than one indicate?
a. The project is within its scheduled time.
b. The project is outside its scheduled time.
c. The project is over budget.
d. The project is under budget.
Foundation Topics
Cost Baseline
Project cost control involves monitoring the project’s costs and managing changes to the cost baseline. The cost baseline is the approved project budget. The project budget starts as the cost baseline; however, unlike the cost baseline, the project budget can be changed through formal change control. Project cost control allows project managers to recognize variances from the project plan in order to take corrective action. The project budget and project schedule are closely related. Project managers must understand the relationship between the consumption of project funds and the actual project work being completed.
To properly control costs, project managers must understand total project cost, expenditure tracking and reporting, burn rate, cost baseline/budget (plan versus actual), and cost control calculations (including EVM, EAC, ETC, and TCPI).
Total Project Cost
Total project cost is defined as all costs specific to a project incurred from the Initiating phase to the Closing phase. This value is composed of all the estimated costs in the initial project budget, also known as total estimated costs (TEC), and all other costs related to a project that are not included in the TEC, also known as other project costs (OPCs). OPCs can be formally approved through the change management process or paid for using the project reserves.
Note
Project reserves are discussed in detail later in this chapter.
Expenditure Tracking and Reporting
Expenditure tracking and reporting helps a project manager to evaluate the project’s financial status. Expenditures are usually tracked based on the work breakdown structure (WBS) so that each expenditure can be linked to a specific activity. Each activity or task in the WBS will have associated costs of completing that activity or task, including personnel, procurement, training, travel, and so on.
When tracking expenditures, project managers should use the associated WBS code and activity, creating a cost report that includes budgeted expenses, actual expenses, and the difference between those two values.
EXAMPLE: Table 3-2 shows an example of an expenditure tracking cost report for a remodeling project. The Demolition activity (WBS code 1.0) includes demolishing the floors, walls, and cabinets. According to this cost report, the wall demolition came in under budget, but the flooring and cabinet demolition was more expensive than projected. Tracking expenditures in this manner helps project managers to quickly identify where/when additional funds are needed.
Table 3-2 Expenditure Tracking Cost Report Example
WBS Code |
Activity |
Budget |
Actual |
Budget – Actual |
1.0 |
Demolition |
$20,000 |
$20,450 |
–$450 |
1.1 |
Flooring |
$5,000 |
$5,250 |
–$250 |
1.2 |
Walls |
$7,500 |
$7,000 |
$500 |
1.3 |
Cabinets |
$2,500 |
$3,000 |
–$500 |
The project manager is responsible for providing updated cost reports to the appropriate stakeholders as stated in the communication plan, which is part of the project management plan. This task may include sending the cost report to the stakeholders or holding a meeting to discuss the report. In most cases, the communication plan details when the cost report can just be sent to the stakeholders and when a meeting may be needed to discuss issues (such as when costs exceed a certain percentage of the budgeted cost for an activity).
Note
Project communication and the communication plan are discussed in greater detail in Chapter 9, “Communication Methods and Influences,” and Chapter 10, “Communication Triggers and Target Audiences.”
Cost Control Calculations
To understand cost control, project managers must first have the project’s budget and cost baseline. Once the cost baseline is determined and approved during the Planning phase of the project, the project budget is compared to the cost baseline to determine any deviations. As mentioned previously, the project budget may vary as project changes are approved, but the cost baseline does not change.
To perform cost control, the project manager uses the cost baseline to measure the project’s expenditures against its achievements. These calculations show a time-phased view of the budget. Before beginning the cost control calculations, the project manager must derive the planned value, earned value, and actual cost of the work as compared against the cost baseline:
Planned value (PV): Indicates the budgeted cost for the amount of work that is currently completed. The following formula computes PV:
(planned % complete) × budget
Earned value (EV): Shows the value a project has earned from the money spent to date. The following formula computes EV:
(% of completed work) × budget
Actual cost (AC): The money spent to date on a project. Calculating AC requires no formula; it is simple addition.
These values quantify the project’s progress to date and help analyze how close to budget the project is running.
Earned Value Management (EVM)
Next, the project manager must understand earned value management (EVM). EVM calculations combine scope, schedule, and resource measurements to assess the project’s performance, using four EVM formulas:
Schedule variance (SV): The difference between the earned value and the planned value.
Cost variance (CV): The budget deficit or surplus at any given point in time.
Schedule performance index (SPI): The ratio of earned value to planned value.
Cost performance index (CPI): The ratio of earned value to actual cost.
In some cases, a project manager may need to understand burn rate, which is simply the rate at which the project budget is being spent. The burn rate is an inverse of CPI.
The SV, CV, SPI, and CPI are all calculated from the PV, EV, and AC. Table 3-3 shows the formulas used to calculate all of the EVM values.
Table 3-3 Earned Value Management (EVM) Value Calculations
EVM |
Formula |
Planned value (PV) |
(planned % complete) × budget |
Earned value (EV) |
(% of completed work) × budget |
Schedule variance (SV) |
EV – PV |
Cost variance (CV) |
EV – AC |
Schedule performance index (SPI) |
EV / PV |
Cost performance index (CPI) |
EV / AC |
Burn rate |
1 / CPI |
EXAMPLE: A project manager has a project to be completed in six months for a total cost of $50,000. The schedule says that three months into the project, 50% of the work should be completed. PV is calculated as follows:
PV = 50% × $50,000
PV = $25,000
In this project, the project manager determines that during those three months,
only 40% of the work was completed. EV is then calculated as follows:
EV = 40% × $50,000
EV = $20,000
When completing the cost report, the project manager determines that the amount spent to date is $20,000. This is AC. Now the project manager can compute the variances.
SV is calculated as follows:
SV = $20,000 – $25,000
SV = –$5,000
A positive SV indicates that the project is ahead of schedule, and a negative SV indicates that the project is behind schedule. A value of zero indicates that the project is on schedule. For this example, the project is behind schedule.
CV is calculated as follows:
CV = $20,000 – $20,000
CV = 0
A positive CV indicates that the project is under budget for the amount of work completed, and a negative CV indicates that the project is over budget for the amount of work completed. A value of zero indicates that the cost for the work completed is on budget. For this example, the project is on budget for the amount of work completed.
SPI is calculated as follows:
SPI = $20,000 / $25,000
SPI = 0.8
An SPI value less than one indicates that less work has been completed than planned, and an SPI greater than one indicates that more work has been completed than planned. A value of one indicates that the planned amount of work has been completed in the planned amount of time. For this project, less work has been completed than planned.
CPI is calculated as follows:
CPI = $20,000 / $20,000
CPI = 1
A CPI greater than one indicates that the project is over budget, and a CPI less than one indicates that the project is under budget. A value of one indicates that the budget is proceeding exactly as planned. For this example, the project is on budget.
Finally, the burn rate is calculated as follows:
Burn rate = 1 / 1
Burn rate = 1
A burn rate greater than one indicates that the project is consuming the budget faster than planned and will exhaust the budget before all the work is completed. A burn rate of less than one indicates that the project is consuming the budget slower than planned and will be completed within the budget. A burn rate of one indicates that the project is consuming the budget as planned and will be completed on budget. For this example, the project is on budget.
Forecasting
Forecasting allows the project manager to predict the project’s future based on current performance. As a project evolves, the project manager may find it necessary to forecast a new estimate at completion (EAC) that is different from the project budget or cost baseline. This situation mainly occurs when project changes have resulted in the need for additional funds, changing the total project cost. For this project management technique, the project manager needs to calculate an estimate to complete (ETC) value, which provides an approximate idea of how much money will be required to complete the remaining balance of project work. The project manager may also want to compare a range of EAC values for more accurate forecasting. Table 3-4 shows other EAC formulas that can help to factor in various scenarios based on current performance.
Table 3-4 Estimate at Completion (EAC) Value Calculations
EAC |
Formula |
EAC using calculated ETC |
AC + ETC |
EAC for work performed at current rate |
AC + (budget – EV) |
EAC for work performed at current CPI |
Budget / CPI |
EAC for work including both CPI and SPI |
AC + [(budget – EV) / (CPI × SPI)] |
EXAMPLE: Returning to the earlier scenario, the following values are determined based on the given parameters:
Budget = $50,000
AC = $20,000
EV = $20,000
CPI = 1
SPI = 0.8
Suppose the project manager determines that the ETC for the remainder of this project is $30,000. The EAC using calculated ETC would be as follows:
EAC = $20,000 + $30,000
EAC = $50,000
This forecast shows no change in the final project cost. However, to derive a range of forecasts, you should also calculate EAC using the three other formulas that represent the EVM values:
EAC for work performed at current rate = $20,000 + ($50,000 – $20,000)
EAC for work performed at current rate = $50,000
EAC for work performed at current CPI = $50,000 / 1
EAC for work performed at current CPI = $50,000
EAC for work including both CPI and SPI = $20,000 +
[($50,000 – $20,000) / (1 × 0.8)]
EAC for work including both CPI and SPI = $20,000 + [($30,000) / (0.8)]
EAC for work including both CPI and SPI = $20,000 + $37,500
EAC for work including both CPI and SPI = $57,500
The forecast budget remains the same for most of these calculations except the one that includes both CPI and SPI in the calculation. This result will not always be the case, as the CPI and SPI may or may not match in projects.
To-Complete Performance Index (TCPI)
The project manager may need to measure the required cost performance for the remaining budgetary resources. With this calculation, the project manager must have a specific goal in mind, such as the project budget or one of the EAC values. The EAC value should be used if it is apparent that the cost baseline is no longer viable. To measure this value, the project manager will need to compute the To-Complete Performance Index (TCPI), using one of the following formulas:
TCPI using current budget = (Budget – EV) / (Budget – AC)
TCPI using EAC value = (Budget – EV) / (EAC – AC)
EXAMPLE: Returning to the earlier scenario, we first compute TCPI using the original cost baseline:
TCPI = ($50,000 – $20,000) / ($50,000 – $20,000)
TCPI = 1
Deciding that the EAC calculation with CPI and SPI gives a better forecast, the project manager determines the TCPI by using the other formula as follows:
TCPI = ($50,000 – $20,000) / ($57,500 – $20,000)
TCPI = $30,000 / $37,500
TCPI = 0.8
A TCPI greater than one indicates that the project is under budget, and a TCPI less than one indicates that the project is over budget. A value of one indicates that the budget is proceeding exactly as planned. For this project, the first TCPI value shows that the project is proceeding as planned, but the second TCPI value shows that the project is over budget.
Note
Do not just memorize these formulas—practice using them. Come up with your own project scenarios, and then complete these calculations. The “Review Questions” section at the end of this chapter also holds some examples.
Reserve Analysis
Reserve analysis is a method of determining funds that are held to account for any cost uncertainty that the project may encounter. To understand reserve analysis, project managers must first understand project reserves, which are provisions in the budget to mitigate cost and/or schedule risks. Two types of project reserves are used in most projects: management reserves and contingency reserves.
A management reserve is a portion of the project budget that is held for management control purposes, mainly used when unforeseen work is needed to complete the project’s scope. This type of reserve specifically addresses unknown risks. The management reserve is not included in the cost baseline but is part of the budget requirements. The arbitrary figure is determined by the project sponsor and project manager. Management reserves become part of the budget only if they are used.
A contingency reserve is a portion of the project budget that is allocated for project risks. This type of reserve specifically addresses identified risks. If a specific risk occurs, then the portion of the contingency reserve allocated for that risk is spent. These reserve amounts are usually calculated using probability and impact calculations. Contingency reserves are part of the cost baseline and budget requirements.
Management reserves can be used at the discretion of the project manager, often in agreement with the project sponsor. Contingency reserves are usually used only if a particular risk occurs, and then only the portion of the contingency reserve allocated for that risk. Unused reserves should be returned to the project sponsor during project closure, unless the project management plan states differently.
Change Requests
Cost performance analysis may result in a change request to the cost baseline, project schedule, or other parts of the project management plan. Change requests should be processed as part of the change control process. If the change is approved and involves funding changes, the budget will need to be revised.
Exam Preparation Tasks
As mentioned in the section “How To Use This Book” in the Introduction, you have several choices for exam preparation: the exercises here; Chapter 15, “Final Preparation”; and the Pearson Test Prep practice test software online.
Review All Key Topics
Review the most important topics in this chapter, noted with the Key Topics icon in the outer margin of the page. Table 3-5 provides a reference of these key topics and the page number on which each begins.
Table 3-5 Key Topics for Chapter 3
Key Topic Element |
Description |
Page Number |
Section |
Overview of cost baseline |
50 |
Section |
Overview of total project cost |
50 |
Section; Table 3-2 |
Overview and example of expenditure tracking |
50 |
Section; Tables 3-3 |
Overview, formulas, and examples for cost control calculations |
51 |
Define Key Terms
Define the following key terms from this chapter and check your answers in the Glossary:
cost control
To-Complete Performance Index (TCPI)
work breakdown structure (WBS)
Review Questions
The answers to these questions appear in Appendix A. For more practice with sample exam questions, use the Pearson Test Prep practice test software online.
1. You have a project to be completed in 12 months, and the total cost of the project is $1,000,000. Six months have passed, and the schedule says that 40% of the work should be completed. What is the project’s planned value (PV) at this point?
a. $600,000
b. $100,000
c. $900,000
d. $400,000
For questions 2–7, refer to the following scenario: You have a project to be completed in 12 months, and the total cost of the project is $1,000,000. Six months have passed. On closer review, you find that only 40% of the work has been completed so far, but the schedule indicates that 60% of the work should be complete.
2. The project has spent $600,000. What is the project’s actual cost (AC) at this point?
a. $100,000
b. $1,000,000
c. $600,000
d. $400,000
3. What is the project’s earned value (EV) at this point?
a. $600,000
b. $400,000
c. $1,000,000
d. $240,000
4. What is the project’s schedule variance (SV) at this point?
a. $200,000
b. –$200,000
c. $100,000
d. –$100,000
5. What is the project’s cost variance (CV) at this point?
a. $400,000
b. $0
c. $200,000
d. –$200,000
6. What is the project’s schedule performance index (SPI) at this point?
a. .5
b. 1
c. 1.5
d. .67
7. What is the project’s cost performance index (CPI) at this point?
a. 1
b. 1.5
c. .67
d. .5
8. You need to determine the burn rate for a current project. Which of the following is the correct formula to use?
a. 1 / CV
b. 1 / SV
c. 1 / SPI
d. 1 / CPI
9. You need to determine if a project is over or under budget. When you complete the CV calculation, you obtain a value of –$43,000. What does this value indicate?
a. The project is under budget for the amount of work completed.
b. The project is over budget for the amount of work completed.
c. The work completed is on budget.
d. More work has been completed than planned.
10. Management contacts you requesting the burn rate for the project you are currently managing. Your burn rate calculation is .75. What does this value indicate?
a. The project is consuming the budget slower than planned.
b. The project is consuming the budget faster than planned.
c. The project is consuming the budget as planned.
d. The budget will be exhausted before all the work is completed.