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Estimating and Managing Costs

An important part of a project manager’s job is managing money. All types of

organizations must manage their money well in order to fulfill their mission, including not-

for-profit and government organizations. The tools and methods used to manage money

on a project vary depending on the phase and complexity of the project. This chapter

describes the methods used to estimate the cost of a project, create a budget, and

manage the cost of activities while the project is being executed.

Estimating Costs

Estimating Costs to Compare and Select Projects

During the conceptual phase when project selection occurs, economic factors are an

important consideration when choosing between competing projects. To compare the

simple paybacks or internal rates of return between projects, an estimate of the cost of

each project is made. The estimates must be accurate enough so that the comparisons are

meaningful, but the amount of time and resources used to make the estimates should be

appropriate to the size and complexity of the project. The methods used to estimate the

cost of the project during the selection phase are generally faster and consume fewer

resources than those used to create detailed estimates in later phases. They rely more on

the expert judgment of experienced managers who can make accurate estimates with less

detailed information. Estimates in the earliest stages of project selection are usually made

using estimates based from previous projects that can be adjusted—scaled—to match the

size and complexity of the current project or by applying standardized formulas.

Analogous Estimate

An estimate that is based on other project estimates is an analogous estimate. If a similar

project costs a certain amount, then it is reasonable to assume that the current project

will cost about the same. Few projects are exactly the same size and complexity, so the

estimate must be adjusted upward or downward to account for the difference. The

Learning Resource

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selection of projects that are similar and the amount of adjustment needed is up to the

judgment of the person who makes the estimate. Normally, this judgment is based on

many years of experience estimating projects, including incorrect estimates that were

learning experiences for the expert.

Analogous Estimate for John’s Move

For example, John asked a friend for advice about the cost of moving. His friend

replied, “I moved from an apartment a little smaller than yours last year and the

distance was about the same. I did it with a fourteen-foot truck. It cost about $575

for the truck rental, pads, hand truck, rope, boxes, and gas.” Because of the similarity

of the projects, John’s initial estimate of the cost of the move was less than $700,

and he decided that the cost would be affordable and the project could go forward.

Less experienced managers who are required to make analogous estimates can look

through the documentation that is available from previous projects. If those projects were

evaluated using the Darnall-Preston Complexity Index (DPCI), the manager can quickly

identify projects that have similar profiles to the project under consideration even if those

projects were managed by other people. Comparing the original estimates with the final

project costs on several previous projects with the same DPCI ratings gives a less

experienced manager the perspective that it would take many years to acquire by trial and

error. It also provides references the manager can use to justify the estimate.

Parametric Estimate

If the project consists of activities that are common to many other projects, average costs

are available per unit. For example, if you ask a construction company how much it would

cost to build a standard office building, they will ask for the size of the building in square

feet and the city in which the building will be built. From these two factors—size and

location—the company’s estimator can predict the cost of the building. Factors like size

and location are parameters—measurable factors that can be used in an equation to

calculate a result. The estimator knows the average cost per square foot of a typical office

building and adjustments for local labor costs. Other parameters such as quality of

finishes are used to further refine the estimate. Estimates that are calculated by

multiplying measured parameters by cost-per-unit values are parametric estimates.

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Parametric Estimates for John’s Move

To estimate the size of the truck needed for John’s move, the parameter used by a

truck rental company is the number of bedrooms, as shown below.

Moving Trucks

Truck size Number of bedrooms

26’ 4+ bedrooms

24’ 3–4 bedrooms

17’ 2–3 bedrooms

14’ 1–2 bedrooms

10’ apartment

The moving company assumes that the number of bedrooms is the important parameter

in determining how big a truck is needed for a move. For John’s move, he has a one-

bedroom apartment, so he chooses the fourteen-foot truck. Once the size is determined,

other parameters, such as distance and days, are used to estimate the cost of the truck

rental.

Estimating Costs to Initiate Projects

Once the project is selected, more accurate estimates are often needed to raise funds and

agree on contracts with vendors in the initiation phase.

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Estimate During the Initiation Phase of John’s Move

John recalled that his friend also told him how tiring it was to do all the packing,

loading, and driving himself, and some items were damaged when the load shifted

inside the truck during the trip. John decides to call in favors from two friends, Dion

and Carlita, to help him pack in Chicago and to hire some of the skilled labor like

that needed to load the truck properly.

Vendor Bid Analysis

If services or products will be provided by vendors, the cost of those services can be

determined by issuing a request for proposal (RFP). The RFP describes the work, service,

or product to be provided by the vendor and the quality level required. The RFP is sent to

a list of vendors who are qualified—meet standards of reliability and capability—to

perform this type of work. They respond with a proposal for completing the work

described in the RFP, including an estimate of the cost. Some government organizations

are required to use the qualified vendor with the lowest bid. Other organizations are not

bound to take the lowest bid but are usually required to justify their reasons for not doing

so.

Using RFPs to Make Estimates on John’s Move

John wants to find out how much it would cost to hire a skilled crew to load and

secure the furniture in the truck and then have another crew from the same

company meet him in Atlanta to unload the truck and help him unpack. He is not

sure if any companies offer this option, so he decides to ask three moving

companies for bids. He also decides to ask for bids on a standard move that includes

all phases of packing, loading, transportation, and unloading as a comparison to see

if his cost-saving plan is worth the extra effort.

The project management team can review the responses by several vendors to the RFP to

determine if their estimate of the cost of that aspect of the project is close to the

estimate made during the project selection stage. If the estimates by the vendors are

much higher than expected, and if the project cannot be completed for the cost that was

used to select the project, the selection decision might have to be reconsidered.

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Reconsidering the selection of the project should take into consideration the economic

ratings of the competing projects that were not chosen and who the project champions

are for the projects that would be affected.

Some vendors may suggest an alternative way to meet the objective of the RFP in a more

cost-effective manner that does not match the specifics of the RFP. Such alternatives can

reduce costs if they are acceptable.

Bottom-Up Estimating

The most accurate and time-consuming estimating method is to identify the cost of each

item in each activity of the schedule, including labor and materials. If you view the project

schedule as a hierarchy where the general descriptions of tasks are at the top and the

lower levels become more detailed, finding the price of each item at the lowest level and

then summing them to determine the cost of higher levels is called bottom-up estimating.

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Bottom-Up Estimate for John’s Move

After evaluating the bids by the moving companies, John decides the savings are

worth his time if he can get the packing done with the help of his friends. He

decides to prepare a detailed estimate of costs for packing materials and use of a

rental truck. He looks up the prices for packing materials and truck rental costs on

company Web sites and prepares a detailed list of items, quantities, and costs, as

shown below.

Detailed Cost Estimate

Category Description

Quantit

Unit

price Cost

Packing

materials

Small boxes 10 $1.70 $17.00

Packing

materials

Medium boxes 15 $2.35 $35.25

Packing

materials

Large boxes 7 $3.00 $21.00

Packing

materials

Extra large boxes 7 $3.75 $26.25

Packing

materials

Short hanger boxes 3 $7.95 $23.85

Packing

materials

Box tape 2 $3.85 $7.70

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Category Description

Quantit

Unit

price Cost

Packing

materials

Markers 2 $1.50 $3.00

Packing

materials

Mattress/Spring

bags

2 $2.95 $5.90

Packing

materials

Lift straps per pair 1 $24.95 $24.95

Packing

materials

Bubble wrap 1 $19.95 $19.95

Packing

materials

Furniture pads 4 $7.95 $31.80

Truck Rental $400.0

Truck Gas at 10mpg 200 $2.25 $45.00

This type of estimate is typically more accurate than an analogous or parametric

estimate. In this example, the sum of packing materials and truck expenses is

estimated to be $661.25.

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The detail can be rolled up—subtotaled—to display less detail. This process is made easier

using computer software. On projects with low complexity, the cost estimates can be

done on spreadsheet software.

For example, the subtotal feature could be used in Excel and collapsed to show the

subtotals for the two categories of costs.On larger projects, software that manages

schedules can also manage costs and display costs by activity and by category.

Activity-Based Estimates

An activity can have costs from more than one vendor plus costs for labor and materials

from internal sources. Detailed estimates from all sources can be reorganized so those

costs that are associated with a particular activity can be grouped by adding the activity

code to the detailed estimate, as shown in the table below.

Detailed Costs Associated with Activities

Category Description

Activi

Quanti

Unit

price Cost

Packing

materials

Small boxes 2.1 10 $1.70 $17.00

Packing

materials

Medium boxes 2.1 15 $2.35 $35.25

Packing

materials

Large boxes 2.1 7 $3.00 $21.00

Packing

materials

Extra large boxes 2.1 7 $3.75 $26.25

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Category Description

Activi

Quanti

Unit

price Cost

Packing

materials

Short hanger

boxes

2.1 3 $7.95 $23.85

Packing

materials

Box tape 2.1 2 $3.85 $7.70

Packing

materials

Markers 2.1 2 $1.50 $3.00

Packing

materials

Mattress/Spring

bags

2.1 2 $2.95 $5.90

Packing

materials

Lift straps per pair 2.1 1 $24.95 $24.95

Packing

materials

Bubble wrap 2.1 1 $19.95 $19.95

Packing

materials

Furniture pads 2.1 4 $7.95 $31.80

Truck Rental 2.2 $400.0

Truck Gas at 10mpg 2.2 200 $2.25 $45.00

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The detailed cost estimates can be sorted by activity and then subtotaled by activity to

determine the cost for each activity.

Establishing a Budget

Once the cost of each activity is estimated, it is possible to determine how much money is

needed for each group of tasks and for the whole project.

Cost of Tasks

The cost of each group of activities of the project can be estimated by summing the costs

of the components of each activity in the group. This process of subtotaling costs by

category or activity is called cost aggregation.

Budget Timeline

Because the costs are associated with activities and each activity has a start date and a

duration, it is possible to calculate how much money needs to be spent by any particular

date during the project. The money needed to pay for a project is usually transferred to

the project account shortly before it is needed. These transfers must be timed so that the

money is there to pay for each activity without causing a delay in the start of the activity.

If the money is transferred too far in advance, the organization will lose the opportunity

to use the money somewhere else, or they will have to pay unnecessary interest charges if

the money is borrowed. A schedule of money transfers is created that should match the

need to pay for the activities. The process of matching the schedule of transfers with the

schedule of activity payments is called reconciliation. Refer to the table below, which

shows the costs of ten major activities in a project. Funds are transferred into the project

account four times. Notice that during most of the project, there were more funds

available than were spent except at Activity 6 when all the available funds were spent.

Fund Transfers and Expenditures

Activity 1 2 3 4 5 6 7 8 9 10

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Cost 5

Total

spent

1,1

1,3

1,4

1,8

2,1

2,6

Transfers 4

Total

funding

1,3

2,0

2,6

Cash in

account

- 60

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Total Funding and Expenditure per Activity

In the project budget profile shown in the table above, there is no margin for error if the

total of the first six activities exceeds the amount of funding at that point in the project.

Contractual agreements with vendors often require partial payment of their costs during

the project. Those contracts can be managed more conveniently if the unit of measure for

partial completion is the same as that used for cost budgeting. For example, if a contractor

is pouring concrete for a large project, their contract may call for partial payment after 25

percent of the total volume of concrete is poured as determined by cubic yards of

concrete.

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Analogous estimating scales an estimate from a similar project to

match the current project. Parametric estimating multiplies a

standard cost-per-unit value by the number of units in the project.

Bids from contractors can be compared to estimate costs. Bottom-

up estimating determines the cost of each detail and aggregates

them to determine activity cost estimates.

During the project selection and approval stage, rough estimates

are used that are usually obtained using analogous and parametric

methods. Vendor bid analysis and detailed bottom-up estimates are

used in the initiation phase to estimate project costs.

Detailed estimates are associated with activities and aggregated

during the planning phase to create an activity-based budget.

Funding transfers are arranged to reconcile money spent to money

from funding sources in a timely manner.

Managing the Budget

Managing Cash Flow

If the total amount spent on a project is equal to or less than the amount budgeted, the

project can still be in trouble if the funding for the project is not available when it is

needed. There is a natural tension between the financial people in an organization, who

do not want to pay for the use of money that is just sitting in a checking account, and the

project manager, who wants to be sure that there is enough money available to pay for

project expenses. The financial people prefer to keep the company’s money working in

other investments until the last moment before transferring it to the project account. The

contractors and vendors have similar concerns, and they want to get paid as soon as

possible so they can put the money to work in their own organizations. The project

manager would like to have as much cash available as possible to use if activities exceed

budget expectations.

Contingency Reserves

Key Points

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Most projects have something unexpected occur that increases costs above the original

estimates. If estimates are rarely exceeded, the estimating method should be reviewed

because the estimates are too high. It is not possible to predict which activities cost more

than expected, but it is reasonable to assume that some of them will be. Estimating the

likelihood of such events is part of risk analysis, which is discussed in more detail in a later

chapter.

Instead of overestimating each cost, money is budgeted for dealing with unplanned but

statistically predictable cost increases. Funds allocated for this purpose are called

contingency reserves (Project Management Institute, Inc., 2008). Because it is likely that

this money will be spent, it is part of the total budget for the project. If this fund is

adequate to meet the unplanned expenses, then the project will complete within the

budget.

Management Reserves

If something occurs during the project that requires a change in the project scope, money

may be needed to deal with the situation before a change in scope can be negotiated with

the project sponsor or client. It could be an opportunity as well as a challenge. Money can

be made available to the project to be used at the discretion of the manager to meet

needs that would change the scope of the project. These funds are called management

reserves. Unlike contingency reserves, they are not likely to be spent and are not part of

the project’s budget baseline, but they can be included in the total project budget (Project

Management Institute, Inc., 2008).

Evaluating the Budget During the Project

A project manager must regularly compare the amount of money spent with the budgeted

amount and report this information to managers and stakeholders. It is necessary to

establish an understanding of how this progress will be measured and reported.

Reporting Budget Progress on John’s Move

In the John’s move example, he estimated that the move would cost about $1,500

and take about sixteen days. Eight days into the project, John has spent $300. John

tells his friends that the project is going well because he is halfway through the

project but has only spent a fifth of his budget. John’s friend Carlita points out that

his report is not sufficient because he did not compare the amount spent to the

budgeted amount for the activities that should be done by the eighth day.

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As John’s friend points out, a budget report must compare the amount spent with the

amount that is expected to be spent by that point in the project. Basic measures such as

percentage of activities completed, percentage of measurement units completed, and

percentage of budget spent are adequate for less complex projects, but more

sophisticated techniques are used for projects with higher complexity.

Earned Value Management

A method that is widely used for medium- and high-complexity projects is the earned

value management (EVM) method. EVM is a method of comparing the budgeted and

actual costs of a project periodically during the project. It combines the scheduled

activities with detailed cost estimates of each activity. It allows for partial completion of

an activity if some of the detailed costs associated with the activity have been paid but

others have not. The earned value analysis method compares the anticipated cost of work

that is scheduled to be done at a given point in time against what has been done and how

much it actually cost.

The Budgeted Cost of Work and Planned Value

The budgeted cost of work scheduled (BCWS) comprises the detailed cost estimates for

each activity in the project. The amount of work that should have been done by a

particular date is the planned value (PV). These terms are used interchangeably by some

sources, but the planned value term is used in formulas to refer to the sum of the

budgeted cost of work up to a particular point in the project, so we will make that

distinction in the definitions in this text for clarity.

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Planned Value on Day Six of John’s Move

On day six of the project, John should have taken his friends to lunch and purchased

the packing materials. The portion of the BCWS that should have been done by that

date (the planned value) is listed in the table below. This is the planned value for day

six of the project.

Planned Value for Lunch and Packing Materials

Description Quantity Cost

Lunch 3 $45.00

Small boxes 10 $17.00

Medium boxes 15 $35.25

Large boxes 7 $21.00

Extra large boxes 7 $26.25

Short hanger boxes 3 $23.85

Box tape 2 $7.70

Markers 2 $3.00

Mattress/Spring bags 2 $5.90

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Description Quantity Cost

Lift straps per pair 1 $24.95

Bubble wrap 1 $19.95

Furniture pads 4 $31.80

Total $261.65

Budgeted Cost of Work Performed and Earned Value

The budgeted cost of work performed (BCWP) is the budgeted cost of work scheduled

that has been done. If you sum the BCWP values up to that point in the project schedule,

you have the earned value (EV).

Actual Cost

The amount spent on an item is often more or less than the estimated amount that was

budgeted for that item. The actual cost (AC) is the sum of the amounts actually spent on

the items.

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Comparing PV, EV, and AC in John’s Move on Day Six

Dion and Carlita were both trying to lose weight and just wanted a nice salad.

Consequently, the lunch cost less than expected. John makes a stop at a store that

sells moving supplies at discount rates. They do not have all the items he needs, but

the prices are lower than those quoted by the moving company. They have a very

good price on lifting straps so he decides to buy an extra pair. He returns with some

of the items on his list, but this phase of the job is not complete by the end of day

six. John bought half of the small boxes, all of five other items, twice as many lifting

straps, and none of four other items. John is only six days into his project, and his

costs and performance are starting to vary from the plan. Earned value analysis

gives us a method for reporting that progress. Refer to the figure below.

Planned Value, Earned Value, and Actual Cost

Budgeted Cost of

Work Scheduled

(BCWS)

Budgeted Cost of

Work Performed

(BCWS)

Actual Cost

(AC)

Descripti

Quantity Cost Quantity Cost Quant

ity

Lunch 3 $45.

3 $45.

3 $4

Small

boxes

10 $17.

5 $17.

5 $1

Note: The original schedule called for spending $261.65 (PV) by day six. The

amount of work done was worth $162.10 (EV) according to the estimates, but

the actual cost was only $154.50 (AC).

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Budgeted Cost of

Work Scheduled

(BCWS)

Budgeted Cost of

Work Performed

(BCWS)

Actual Cost

(AC)

Medium

boxes

15 $35.

15 $3

Large

boxes

7 $21.

Extra

large

7 $26.

Short

hanger

3 $23.

Box tape 2 $7.7

2 $7.7

2 $7

Markers 2 $3.0

2 $3.0

2 $3

Note: The original schedule called for spending $261.65 (PV) by day six. The

amount of work done was worth $162.10 (EV) according to the estimates, but

the actual cost was only $154.50 (AC).

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Budgeted Cost of

Work Scheduled

(BCWS)

Budgeted Cost of

Work Performed

(BCWS)

Actual Cost

(AC)

Mattress

/Spring

bags

2 $5.9

2 $5

Lift

straps

per pair

1 $24.

2 $2

Bubble

wrap

1 $19.

Furniture

pads

4 $31.

4 $2

Planned

Value (PV)

$26

1.65

Earned

Value (EV)

$16

2.10

Actual

cost

(AC)

Note: The original schedule called for spending $261.65 (PV) by day six. The

amount of work done was worth $162.10 (EV) according to the estimates, but

the actual cost was only $154.50 (AC).

Schedule Variance

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The project manager must know if the project is on schedule and within the budget. The

difference between planned and actual progress is the variance. The schedule variance

(SV) is the difference between the earned value (EV) and the planned value (PV).

Expressed as a formula, SV = EV − PV. If less value has been earned than was planned, the

schedule variance is negative, which means the project is behind schedule.

Schedule Variance on John’s Move

Planning for John’s move calls for spending $261.65 by day six, which is the planned

value (PV). The difference between the planned value and the earned value is the

scheduled variance (SV). The formula is SV = EV − PV. In this example, SV = $162.10

− $261.65 = $(99.55) A negative SV indicates the project is behind schedule.

The difference between the earned value (EV) and the actual cost (AC) is the cost

variance (CV). Expressed as a formula, CV = EV − AC

Cost Variance on John’s Move

The difference between the earned value of $162.10 and the actual cost of $154.50

is the cost variance (CV). The formula is CV = EV − AC. In this example, CV =

$162.10 − $154.50 = $7.60.

A positive CV indicates the project is under budget.

Variance Indexes for Schedule and Cost

The schedule variance and the cost variance provide the amount by which the spending is

behind (or ahead of) schedule and the amount by which a project is exceeding (or less

than) its budget. They do not give an idea of how these amounts compare with the total

budget.

The ratio of earned value to planned value gives an indication of how much of the project

is completed. This ratio is the schedule performance index (SPI). The formula is SPI =

EV/PV. In the John’s move example, the SPI equals 0.62 (SPI = $162.10/$261.65 = 0.62)

A SPI value less than one indicates the project is behind schedule.

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The ratio of the earned value to the actual cost is the cost performance index (CPI). The

formula is CPI = EV/AC.

Cost Performance Index of John’s Move

In the John’s move example, CPI = $162.10 / $154.50 = 1.05 A value greater than 1

indicates the project is under budget.

Schedule Variance and Cost Variance on Day Six

The cost variance of positive $7.60 and the CPI value of 1.05 tell John that he is

getting more value for his money than planned for the tasks scheduled by day six.

The schedule variance (SV) of negative $99.55 and the schedule performance index

(SPI) of 0.62 tell him that he is behind schedule in adding value to the project.

During the project, the manager can evaluate the schedule using the schedule variance

(SV) and the schedule performance index (SPI) and the budget using the cost variance (CV)

and the cost performance index (CPI).

Estimated Cost to Complete the Project

Partway through the project, the manager evaluates the accuracy of the cost estimates for

the activities that have taken place and uses that experience to predict how much money

it will take to complete the unfinished activities of the project—the estimate to complete

(ETC).

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Atypical Cost Variance

To calculate the ETC, the manager must decide if the cost variance observed in the

estimates to that point are representative of the future. For example, if unusually bad

weather causes increased cost during the first part of the project, it is not likely to have

the same effect on the rest of the project. If the manager decides that the cost variance

up to this point in the project is atypical—not typical—then the estimate to complete is

the difference between the original budget for the entire project—the budget at

completion (BAC)—and the earned value (EV) up to that point.

Expressed as a formula, ETC = BAC − EV.

Estimate to Complete John’s Move

In John’s move, John was able to buy most of the items at a discount house that did

not have a complete inventory and, he chose to buy an extra pair of lift straps. He

knows that the planned values for packing materials were obtained from the price

list at the moving company where he will have to buy the rest of the items, so those

two factors are not likely to be typical of the remaining purchases. The reduced cost

of lunch is unrelated to the future costs of packing materials, truck rentals, and hotel

fees. John decides that the factors that caused the variances are atypical. He

calculates that the estimate to complete (ETC) is the budget at completion ($1,534)

minus the earned value at that point ($162.10), which equals $1,371.90. Expressed

as a formula, ETC = $1,534 − $162.10 = $1,371.90.

Typical Cost Variance

If the manager decides that the cost variance is caused by factors that will affect the

remaining activities, such as higher labor and material costs, then the estimate to

complete (ETC) needs to be adjusted by dividing it by the cost performance index (CPI).

For example, if labor costs on the first part of a project are estimated at $80,000 (EV) and

they actually cost $85,000 (AC), the cost variance will be 0.94. (Recall that the cost

variance = EV – AC).

To calculate the estimate to complete (ETC) assuming the cost variance on known

activities is typical of future cost, the formula is ETC = (BAC – EV)/CPI. If the budget at

completion (BAC) of the project is $800,000, the estimate to complete is ($800,000 –

$80,000) / 0.94 = $766,000.

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Estimate Final Project Cost

If the costs of the activities up to the present vary from the original estimates, it will

affect the total estimate for the project cost. The new estimate of the project cost is the

estimate at completion (EAC). To calculate the EAC, the estimate to complete (ETC) is

added to the actual cost (AC) of the activities already performed. Expressed as a formula,

EAC = AC + ETC.

Estimate at Completion for John’s Move

The revised estimate at completion (EAC) for John’s move at this point in the

process is EAC = $154.50 + $1,371.90 = $1,526.40.

Refer to the table below for a summary of terms and formulas.

Summary of Terms and Formulas for Earned Value Analysis

Term

m Description Formula

John’

Mov

Actual cost AC The money actually spent on

projects up to the present

$154

.50

Budget at

completion

Original budget for the project

(same as BCWS)

$1,5

34.0

Cost

performance

index

Ratio of earned value to actual

cost

CPI = EV /

1.05

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Term

m Description Formula

John’

Mov

Cost variance CV Difference between earned value

and actual cost

CV = EV -

$7.6

Earned value EV Sum of estimates for work

actually done up to the present

$162

.10

Estimate at

completion

Revised estimate of total project

cost

EAC = AC

+ ETC

$1,5

26.4

Estimate to

complete

Money to complete the project if

early cost variance is typical

ETC =

BAC - EV

$1,3

71.9

Estimate to

complete

Money to complete the project if

early cost variance is atypical

ETC =

(BAC- EV)

/ CPI

N/A

Planned value PV Sum of the estimates for work

done up to the present

$261

.65

Schedule

performance

index

Ratio of earned value to planned

value

SPI = EV /

.62

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Term

m Description Formula

John’

Mov

Schedule

variance

SV Difference between earned value

and planned value

SV = EV -

$(99.

55)

Extra money is allocated in a contingency fund to deal with

activities where costs exceed estimates. Funds are allocated in a

management reserves in case a significant opportunity or challenge

occurs that requires change of scope but funds are needed

immediately before a scope change can typically be negotiated.

Schedule variance is the difference between the part of the budget

that has been done so far (EV) versus the part that was planned to

be completed by now (PV). Similarly, the cost variance is the

difference between the EV and the actual cost (AC).

The schedule performance index (SPI) is the ratio of the earned

value and the planned value. The cost performance index (CPI) is

the ratio of the earned value (EV) to the actual cost (AC).

The formula used to calculate the amount of money needed to

complete the project (ETC) depends on whether or not the cost

variance to this point is expected to continue (typical) or not

(atypical). If the cost variance is atypical, the ETC is simply the

original total budget (BAC) minus the earned value (EV). If they are

typical of future cost variances, the ETC is adjusted by dividing the

difference between BAC and EV by the CPI.

The final budget is the actual cost (AC) to this point plus the

estimate to complete (ETC).

Key Points

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References

Project Management Institute, Inc., A Guide to the Project Management Body of

Knowledge (PMBOK Guide), 4th ed. (Newtown Square, PA: Project Management Institute,

Inc., 2008), 173.

Licenses and Attributions

Chapter 9: Estimating and Managing Costs

(http://open.lib.umn.edu/projectmanagement/part/chapter-9-estimating-and-managing-

costs/) from Project Management from Simple to Complex by the University of

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NonCommercial-ShareAlike 4.0 International (https://creativecommons.org/licenses/by-

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