PMP Exam Flashcards: Cost Management, Budget, Estimation Techniques, Funding

Analogous estimating uses actual data from similar past projects as the basis for the current estimate, such as estimating a new building's cost based on a similar one completed last year. It is quick but less accurate. Parametric estimating uses statistical relationships between historical data and project variables, such as cost per square foot or hours per line of code, multiplied by the quantity needed. It is more accurate than analogous when good data exists. Bottom-up estimating estimates each work package individually and rolls them up to a project total.

A cost estimate is the predicted cost of each activity or work package based on available information at a given time. The cost baseline is the approved, time-phased budget that serves as the reference point for measuring cost performance, including all authorized work and contingency reserves but excluding management reserves. The project budget equals the cost baseline plus management reserves. In formula terms: activity estimates plus contingency reserves equals cost baseline, and cost baseline plus management reserves equals project budget.

Direct costs are expenses directly attributable to a specific project, such as team salaries assigned to the project, materials purchased for the project, equipment rented for the project, and travel for project activities. Indirect costs are shared expenses that benefit multiple projects or the organization as a whole and cannot be traced to a single project, such as rent, utilities, administrative staff, corporate IT infrastructure, and executive salaries. Indirect costs are typically allocated to projects using overhead rates.

A rough order of magnitude, or ROM, estimate is a preliminary cost or duration estimate made early in the project lifecycle when limited information is available. ROM estimates typically have an accuracy range of negative 25 to positive 75 percent, meaning the actual cost could be 25 percent less or 75 percent more than estimated. As the project progresses and more detail emerges, estimates are refined: a budget estimate has a range of negative 10 to positive 25 percent, and a definitive estimate has a range of negative 5 to positive 10 percent.

The cost of quality encompasses all costs incurred to ensure quality and the costs resulting from poor quality. It has two categories: the cost of conformance, which is money spent to prevent defects and includes prevention costs like training, process improvement, and quality planning, and appraisal costs like inspections, testing, and audits. The cost of nonconformance is money spent because of defects and includes internal failure costs like rework, scrap, and retesting, and external failure costs like warranty claims, liability, and reputation damage.

Funding limit reconciliation is the process of comparing planned project expenditures against the organization's funding constraints over time. Organizations rarely provide unlimited funding. Instead, funds are disbursed in increments tied to fiscal periods or project milestones. If planned spending exceeds available funding in a given period, work must be rescheduled to smooth expenditures within the funding limits. This may change the project schedule. ---