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7 - Project Cost Management Terms
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- 1Actual CostThe actual amount of monies the project
has spent to date. - 2Analogous estimatingAn approach that relies on historical
information to predict the cost of the
current project. It is also known as topdown estimating and is the least reliable of all the cost-estimating approaches. - 3Bottom-up estimatingAn estimating approach that starts from
zero, accounts for each component of the WBS, and arrives at a sum for the
project. It is completed with the project
team and can be one of the most timeconsuming
and most reliable methods to
predict project costs. - 4Budget estimateThis estimate is also somewhat broad
and is used early in the planning
processes and also in top-down
estimates. The range of variance for the
estimate can be from –10 percent to +25
percent. - 5Commercial databaseA cost-estimating approach that uses a
database, typically software-driven, to
create the cost estimate for a project.
Contingency reserve - 6Contingency reserveA contingency allowance to account for
overruns in costs. Contingency
allowances are used at the project
manager’s discretion and with
management’s approval to counteract
cost overruns for scheduled activities and risk events. - 7Cost aggregationCosts are parallel to each WBS work package. The costs of each work package are aggregated to their corresponding control accounts. Each control account then is aggregated to the sum of the project costs.
- 8Cost baselineA time-lapse exposure of when the project monies are to be spent in relation to cumulative values of the work completed in the project.
- 9Cost budgetingThe cost aggregation achieved by assigning specific dollar amounts for each of the scheduled activities or, more likely, for each of the work packages in the WBS. Cost budgeting applies the cost estimates over time.
- 10Cost change control systemA system that examines any changes associated with scope changes, the cost of materials, and the cost of any other resources, and the associated impact on the overall project cost.
- 11Cost management planThe cost management plan dictates how cost variances will be managed.
- 12Cost of poor qualityThe monies spent to recover from not adhering to the expected level of quality. Examples may include rework, defect repair, loss of life or limb because safety precautions were not taken, loss of sales, and loss of customers. This is also known as the cost of nonconformance to quality.
- 13Cost of qualityThe monies spent to attain the expected level of quality within a project. Examples include training, testing, and safety precautions.
- 14Cost performance index (CPI)Measures the project based on its financial performance. The formula is CPI = EV/AC.
- 15Cost variance (CV)The difference of the earned value amount and the cumulative actual costs of the project. The formula is CV = EV – AC.
- 16Definitive estimateThis estimate type is one of the most accurate. It’s used late in the planning processes and is associated with bottom-up estimating. You need the WBS in order to create the definitive estimate. The range of variance for the estimate can be from –5 percent to +10 percent.
- 17Direct costsCosts are attributed directly to the project work and cannot be shared among projects (for example, airfare, hotels, long-distance phone charges, and so on).
- 18Earned value (EV)Earned value is the physical work completed to date and the authorized budget for that work. It is the percentage of the BAC that represents the actual work completed in the project.
- 19Estimate at completion (EAC)These forecasting formulas predict the likely completed costs of the project based on current scenarios within the project.
Estimate to complete (ETC) - 20Estimate to complete (ETC)An earned value management formula that predicts how much funding the project will require to be completed. Three variations of this formula are based on conditions the project may be experiencing.
- 21Fixed costsCosts that remain constant throughout the life of the project (the cost of a piece of rented equipment for the project, the cost of a consultant brought on to the project, and so on).
- 22Funding limit reconciliationAn organization’s approach to managing cash flow against the project deliverables based on a schedule, milestone accomplishment, or data constraints.
- 23Indirect costsCosts that are representative of more than one project (for example, utilities for the performing organization, access to a training room, project management software license, and so on).
- 24Known unknownAn event that will likely happen within the project, but when it will happen and to what degree is unknown. These events, such as delays, are usually risk-related.
- 25Learning curveAn approach that assumes the cost per unit decreases the more units workers complete, because workers learn as they complete the required work.
- 26OligopolyA market condition where the market is so tight that the actions of one vendor affect the actions of all the others.
- 27Opportunity costThe total cost of the opportunity that is refused to realize an opposing opportunity.
- 28Parametric estimatingAn approach using a parametric model to extrapolate what costs will be needed for a project (for example, cost per hour and cost per unit). It can include variables and points based on conditions.
- 29Planned value (PV)Planned value is the work scheduled and the budget authorized to accomplish that work. It is the percentage of the BAC that reflects where the project should be at this point in time.
- 30Project varianceThe final variance, which is discovered only at the project’s completion. The formula is VAR = BAC – AC.
- 31Regression analysisThis is a statistical approach to predicting what future values may be, based on historical values. Regression analysis creates quantitative predictions based on variables within one value to predict variables in another. This form of estimating relies solely on pure statistical math to reveal relationships between variables and to predict future values.
- 32Reserve analysisCost reserves are for unknown unknowns within a project. The management reserve is not part of the project cost baseline, but is included as part of the project budget.
- 33Rough order of magnitudeThis rough estimate is used during the initiating processes and in top-down estimates. The range of variance for the estimate can be from –25 percent to +75 percent.
- 34Schedule performance index (SPI)Measures the project based on its schedule performance. The formula is SPI = EV/PV.
- 35Schedule variance (SV)The difference between the earned value and the planned value. The formulas is SV = EV – PV.
- 36Single sourceMany vendors can provide what your project needs to purchase, but you prefer to work with a specific vendor.
- 37Sole sourceOnly one vendor can provide what your project needs to purchase. Examples include a specific consultant, specialized service, or unique type of material.
- 38Sunk costsMonies that have already been invested in a project.
- 39To-Complete Performance IndexA formula to forecast the likelihood of a project to achieve its goals based on what’s happening in the project right now. There are two different flavors for the TCPI, depending on what you want to accomplish. If you want to see if your project can meet the budget at completion, you’ll use this formula: TCPI = (BAC – EV)/(BAC – AC). If you want to see if your project can meet the newly created estimate at completion, you’ll use this version of the formula: TCPI = (BAC – EV)/(EAC – AC).
- 40Variable costsCosts that change based on the conditions applied in the project (the number of meeting participants, the supply of and demand for materials, and so on).
- 41VarianceThe difference between what was expected and what was experienced.
- 42Variance at completion (VAC)A forecasting formula that predicts how much of a variance the project will likely have based on current conditions within the project. The formula is VAC = BAC – EAC.
- 43Future Value of MoneyFormula to calculate ROI:
FV=PV x (1+ i)n - 44Present Value of money (based on a future value)PV = FV / (1+i)n
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- 7 - Project Cost Management Terms
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- Daniel Gomez-Windshuttle
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