PMP PREPARATION : COST

I cleared my PMP on 26th may 2014. I have gone through all the three books PMBOK, RITA MULCAHY'S and HEAD FIRST. During preparation I made few notes. so the material has been picked up from all the three books and these are just the key points. 
 NOTE : IT IS RECOMMENDED THAT ONE SHOULD READ THESE POINTS IN DETAIL FROM THE BOOKS (which ever interests you more) AND ONLY AFTER YOU HAVE FINISHED A THOROUGH READING, YOU CAN GO THROUGH THESE POINTS FOR CONSOLIDATION.

COST 

• VALUE ENGINEERING : less costly way to do the same work (value analysis)

• FAIT ACCOMPLI : contract is not negotiable

• EARNED VALUE FORMULAS : WILL MAKE A SEPARATE POST WITH ALL THE FORMULAS. WILL EXPLAIN THE TYPE OF QUESTIONS ALSO, YOU ARE GOING TO GET IN THE EXAM . ITS REALLY EASY. SIMPLE FORMULA BASED. SO YOU DONT HAVE TO WORRY ABOUT THIS PART . AT ALL 
• ROUGH ORDER OF MAGNITUDE (ROM), BALL PARK :  Estimate really early, very little accuracy, at initial stage. the first guess without any details.                                                  -25 to +75%  (acceptable range)

• BUDGET ESTIMATE :          -10 to +25% 

• DEFINITIVE ESTIMATE :     + - 10% (plus minus 10%) 

just remember these. questions will be direct

• HOW TO ESTIMATE THE TOTAL COST OF THE PROJECT : this is the clearest way of explaining how you estimate the total budget. i picked this as such from the Rita Mulcahy book. it can not be clearer then this . Read this from the book for even better understanding. you have to start from number one. from the bottom

8. Cost Budget

7. Management Reserve

6. Cost Baseline

5. Contingency Reserves

4. Project Estimate

3. Control Account Estimate

2. Work Package Estimate

1. Activity Estimate

note one : clearly when you add contingency reserve to the project estimate you get cost baseline.

note two : clearly cost baseline does not include Management Reserve 

note three : cost baseline + management reserve = cost budget 

note four : contingency reserves are under PM. PM can spend it as and when required.

note five : management reserves are out of PMs control. he has to take permission to spend this.

remember these. very very important.

• CPI : we are getting --- $ worth of work out of every 1$ spent 

e.g. if the CPI is .87 then we are getting .87$ of work out of every 1$ spent

• SPI : we are (only) progressing at ----% of the rate originally planned 

e.g. if the SPI is .87 then we are progressing at 87% of the rate originally planned 

• TYPES OF COST : Important

1. VARIABLE COST : Change with the amount of production or the amount of work

      e.g. cost of material, supplies, wages etc.

2. FIXED COST : Do not change as the production change

      e.g. cost of set up, rent, utilities etc.

3. DIRECT COST : Spent directly to the work on the project 

      e.g. team travel, team wages, recognition, cost of material used in the project etc.

4. INDIRECT COST : Overhead items or costs incurred for the benefit of more then one project

      e.g. tax, fringe benefit, building guard etc.

• ANALOGOUS ESTIMATE : (TOP DOWN) start with the whole project, without breaking at all, find similar other project, compare with the similar project, use that to come up with new estimate

• BOTTOM UP : Break into pieces, estimate each piece, add them up.

• BENEFIT COST RATIO (BCR) : Money project is going to make vs it will cost to build

• NET PRESENT VALUE (NPV) : Actual value of the project at a given time.

• INTERNAL RATE OF RETURN (IRR) :  Money the project will return to the company that is funding it. %age of allocated fund

you don't have to go any deeper about these definitions of NPV, IRR, BCR etc. you will get simple questions on these. that too is in a numerical form with some numbers. i shall explain it all in the post with formulas 

• COST AGGREGATION : Take activity estimate - roll up into control account on your WBS - now you know how much each work package will cost 

PROJECT FUNDING REQUIREMENT = BUDGET (COST PERFORMANCE BASELINE) + MANAGEMENT RESERVE 

• BUDGET (COST PERFORMANCE BASELINE)  : take out some reserve from this - that is CONTINGENCY RESERVE. this is for the KNOWN risks whose extent is UNKNOWN ...so this is called known unknown. PM can spend it. does not need a permission from the management. 

• MANAGEMENT RESERVE : this is for UNKNOWN risks whose extent also is UNKNOWN. unexpected unplanned cost. PM can not spend this, have to request management

• FUNDING LIMIT RECONCILIATION :  make sure you have not blown your limits. have not exceeded the budget.

• CONTROL ACCOUNTS :  do not represent activities or work package but the cost of the work package and activities.

• LIFE CYCLE COSTING :  Estimating the money it will take to support your product or service when it has been released. it includes the cost of maintenance after release too