Earned Value Formulas in Project Management

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Questions and Answers

What type of costs are retrospective and cannot be recovered?

Direct costs

Indirect costs

Sunk costs (correct)

reserve costs

What is the primary purpose of reserves in a cost estimate?

To mitigate cost risk by allowing for future situations that are difficult to predict (correct)

To reduce the project timeline

To increase the project budget

To allocate funds for unexpected expenses

What is the benefit of defining user requirements and doing early testing on IT projects?

To increase the project budget

To reduce the project timeline

To reduce the cost of software defects (correct)

To improve the quality of the project

Which of the following is NOT a project cost management process?

Project scope management Signup and view all the answers

What is the primary output of the plan cost management process?

Cost management plan Signup and view all the answers

What is the primary focus of cost estimating?

Developing an estimate of costs or resources needed to complete a project work Signup and view all the answers

Why is it important for project managers to take cost estimates seriously?

To complete projects within budget constraints Signup and view all the answers

What type of costs often make up a large percentage of total project costs?

Labor costs Signup and view all the answers

What is cost in the context of project management?

A resource sacrificed to achieve a specific objective Signup and view all the answers

What is the primary goal of project cost management?

To ensure the project is completed within an approved budget Signup and view all the answers

What is the average cost overrun for IT/SW projects according to the CHAOS studies?

18-43 percent Signup and view all the answers

Why do many IT projects involve cost overruns?

Because the original cost estimates are low and based on very unclear project requirements Signup and view all the answers

What is the formula for profit?

Revenues minus expenses Signup and view all the answers

What is life cycle costing?

The total cost of ownership for a project Signup and view all the answers

What is cash flow analysis?

Determining the estimated annual costs and benefits for a project Signup and view all the answers

Why is it important for project managers to acquire cost estimation skills?

Because it is a demanding and important skill that project managers need to acquire Signup and view all the answers

What is the primary goal of cost budgeting in a project?

To allocate project cost estimate to individual work items over time and provide a cost baseline Signup and view all the answers

What is the main advantage of using parametric models, such as COCOMO, for cost estimation?

They are less prone to human bias and error Signup and view all the answers

What is the main difference between top-down and bottom-up estimation techniques?

Top-down estimation uses a previous project as a basis, while bottom-up estimation estimates individual work items Signup and view all the answers

Why is it important to review and ask questions during the cost estimation process?

To ensure that the estimate is accurate and unbiased Signup and view all the answers

What is the primary input required for the cost budgeting process?

Work Breakdown Structure (WBS) Signup and view all the answers

What is the main challenge faced by people who are new to cost estimation?

Lack of experience in cost estimation Signup and view all the answers

What is the main problem with management's approach to cost estimation?

They want a number for a bid, rather than a realistic estimate Signup and view all the answers

What is the purpose of COCOMO II?

To provide a computerized model for estimating software development costs Signup and view all the answers

What is the primary objective of cost control in a project?

To monitor and control changes to the project cost baseline Signup and view all the answers

Which of the following is an input for determining the project budget?

Scope baseline Signup and view all the answers

What is the primary purpose of Earned Value Management (EVM) in project management?

To integrate scope, time, and cost data Signup and view all the answers

What is the term used to describe the total of direct and indirect costs incurred in accomplishing work on an activity during a given period?

Actual Cost (AC) Signup and view all the answers

What is the purpose of monitoring cost performance in project management?

To ensure that project expenses are within budget Signup and view all the answers

What is the term used to describe the percentage of work actually completed multiplied by the planned value?

Earned Value (EV) Signup and view all the answers

What is the primary benefit of using Earned Value Management (EVM) in project management?

To integrate scope, time, and cost data Signup and view all the answers

What is the purpose of informing project stakeholders about changes to the project that will affect costs?

To ensure that stakeholders are informed about changes to the project cost baseline Signup and view all the answers

If a project's CPI is less than 1.0, what does it indicate?

Poor performance Signup and view all the answers

What is the formula to calculate EAC?

BAC/CPI Signup and view all the answers

What does it indicate if the EV line is below the PV line on an Earned Value Chart?

Poor performance Signup and view all the answers

What is the formula to calculate Earned Value?

Percent Completed (%) * BAC Signup and view all the answers

What does a negative CV indicate?

The project is costing more than planned Signup and view all the answers

What is the purpose of dividing the budgeted cost or time by an appropriate index?

To estimate what it will cost to complete a project or how long it will take Signup and view all the answers

What is the formula to calculate Planned Value?

Planned Completion (%) * BAC Signup and view all the answers

What does an EAC of $122,308 indicate?

The project is over budget Signup and view all the answers

Study Notes

Project Cost Management

Project cost management includes the processes required to ensure that the project is completed within an approved budget.
Project managers must ensure that projects are well-defined, have accurate time and cost estimates, and have a realistic budget that they were involved in approving.

The Importance of Project Cost Management

IT/SW projects have a poor track record for meeting budget goals, with cost overruns ranging from 18% to 43% according to CHAOS studies.
Cost overruns can be as high as 33-34% according to other studies.

Reasons for Cost Overruns

Many IT professionals lack the skills to prepare accurate cost estimates.
IT projects often involve new technology, which can lead to risks and untested products.
Unrealistic project cost estimates and unclear project requirements can lead to cost overruns.
Many original cost estimates for IT/SW/IS projects are low to begin with.

Basic Principles of Cost Management

Profits are revenues minus expenses.
Profit margin is the ratio of revenues to profits.
Life cycle costing considers the total cost of ownership, including development and support costs.
Cash flow analysis determines the estimated annual costs and benefits for a project.
Sunk costs are retrospective costs that have already been incurred and cannot be recovered.
Reserves (contingency or management) are dollars included in a cost estimate to mitigate cost risk.

Cost of Software Defects

It is better to spend money to define user requirements and do early testing on IT projects than after implementation.
The cost of repairing a software defect can be significantly higher in the post-product release phase than in the requirements and analysis phase.

Project Cost Management Processes

Plan cost management
Cost estimating
Cost budgeting
Cost control

Plan Cost Management

Plan cost management establishes the policies, procedures, and documentation for planning, managing, expending, and controlling project costs.
The cost management plan describes how cost variances will be managed on the project.
Labor costs are often a large percentage of total project costs, so project managers must develop and track estimates for labor.

Cost Estimating

Cost estimating is the process of developing an estimate of costs or resources needed to complete a project work.
Cost estimates are important for completing projects within budget constraints.
There are different types of cost estimates, and it's important to know how to prepare cost estimates, typical problems associated with IT cost estimates, and estimation tools and techniques.

Cost Estimation Tools and Techniques

Analogous or top-down estimating: uses the actual cost of a previous similar project as the basis for the new estimate.
Bottom-up estimating: estimates individual work items cost and sums them to get a total estimate.
Parametric estimating: uses project characteristics (e.g., lines of code) in a mathematical model to estimate costs.

Constructive Cost Model (COCOMO)

COCOMO is a software development cost estimation model developed by Barry Boehm.
Parameters include source lines of code or function.
COCOMO II is a computerized model available on the web.

Typical Problems with Cost Estimates

Developing an estimate for a large software project is a complex task requiring a significant amount of effort.
Estimates are done at various stages of the project.
Many people doing estimates have little experience doing them.
People have a bias toward underestimation.
Management wants a number for a bid, not a real estimate.

Cost Budgeting/Determining the Budget

Cost budgeting involves allocating project cost estimates to individual work items (work package) over time and providing a cost baseline for performance measures.
The cost management plan, scope baseline, activity cost estimates, basis of estimates, project schedule, resource calendars, risk register, agreements, and organizational process assets are all inputs for determining the budget.

Cost Control

Cost control means controlling changes in project budget.
The process of monitoring status of project cost, updating project costs, and managing changes to project cost baseline.
Earned value management is an important tool for cost control.

Earned Value Management (EVM)

EVM is a project performance measurement technique that integrates scope, time, and cost data.
Given a baseline (original plan plus approved changes), you can determine how well the project is meeting its goals.
EVM is used to help control project costs.

Earned Value Management Terms

Planned value (PV) is that portion of the approved total cost estimate planned to be spent on an activity during a given period.
Actual cost (AC) is the total of direct and indirect costs incurred in accomplishing work on an activity during a given period.
Earned value (EV) is the percentage of work actually completed multiplied by the planned value.