Project Cost Management Quiz

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Questions and Answers

What is the primary risk of not managing costs in a project?

The project will have excess labor costs

The project will be delayed

The costs will continuously increase (correct)

Materials will become more expensive

Which of the following is considered a direct cost?

Utilities bills

Quality control cost

Team wages (correct)

Office equipment rental

Which item generally falls under indirect costs?

Costs of materials used

Insurance costs (correct)

Team travel expenses

Sub-contractor fees

Variable costs are affected by changes in which aspect of production?

Production volume Signup and view all the answers

What is a typical example of a variable cost?

Cost of team materials Signup and view all the answers

Which of the following is NOT a consideration in managing costs?

Team productivity Signup and view all the answers

What distinguishes indirect costs from direct costs?

Indirect costs benefit more than one project Signup and view all the answers

In cost management, which item is likely to be monitored to control expenses effectively?

Cost of cleaning supplies Signup and view all the answers

What characterizes fixed costs in a business?

They remain constant regardless of production levels. Signup and view all the answers

Which of the following is an example of a variable cost?

Cost of materials Signup and view all the answers

What is typically included in the cost management plan process?

Establishing policies and procedures for managing costs Signup and view all the answers

If a company has fixed costs of $10,000, what will happen if no units are produced?

The fixed costs will remain the same. Signup and view all the answers

What is the total cost formula?

Total Costs = Fixed Costs + Variable Costs Signup and view all the answers

In project cost management, what does the estimating cost process involve?

Developing an approximation of resources needed for project activities Signup and view all the answers

Which of the following is NOT a fixed cost?

Wages based on hourly work Signup and view all the answers

What questions does the plan cost management process primarily address?

How to plan and manage costs effectively? Signup and view all the answers

What type of risks do contingency reserves address?

Identified risks Signup and view all the answers

How is a management reserve typically defined?

According to the organization's policy Signup and view all the answers

What is a characteristic of contingency reserves?

They are controlled by project managers. Signup and view all the answers

Who usually manages the management reserve?

The organization's management Signup and view all the answers

Which situation would likely result in a higher management reserve?

A project in an unfamiliar field Signup and view all the answers

What type of risks does the management reserve account for?

Unknown-unknowns Signup and view all the answers

Which of the following statements is true about contingency reserves?

They are estimated using risk management techniques. Signup and view all the answers

What might influence the percentage of management reserve defined for a project?

The project team's experience level Signup and view all the answers

What is the primary purpose of a contingency reserve?

To manage identified risks Signup and view all the answers

Which of the following is true about the management reserve?

It is not part of the performance measurement baseline Signup and view all the answers

How is a project budget calculated?

Cost Baseline + Management Reserve Signup and view all the answers

What must a project manager perform in estimating the total cost of a project?

Risk management analysis Signup and view all the answers

What does the cost baseline consist of?

Cost Estimate + Contingency Reserve Signup and view all the answers

What is the primary action for a project manager to control costs?

Follow the Cost Management Plan Signup and view all the answers

Who needs to grant permission for accessing the management reserve?

Higher management Signup and view all the answers

What aspect of project cost performance is typically monitored?

Authorized budget Signup and view all the answers

Study Notes

Construction Management - Week 10

Course: CEE 345
Class timings: 8:30 am - 9:20 am (Sunday, Tuesday, Thursday)
Instructor: Hisham Qureshi

Cost Management

Cost management is the process of planning and controlling the budget for a business.
Failure to manage costs effectively results in escalating costs.
Key elements to be considered include turnover, profit, revenue, expense, tax, cost, loss, and income statement.

Items to Consider in Managing Costs

Costs are estimated, monitored, and controlled for elements such as:
- Labor (hours and hourly rates).
- Sub-contractors.
- Consultants.
- Materials.
- Travel.
- Equipment and facility rental.
- Other items specific to the project.

Cost Categories

1-Direct costs: Costs directly attributed to project work (e.g., team travel, wages, material costs).
2-Indirect costs: Overhead costs incurred for the benefit of multiple projects (e.g., cleaning supplies, utilities, office equipment, administrative costs, insurance, depreciation).

Contract Bid Summary Example

Direct costs: Material & labor ($80,000), Project overhead (PM & site manager time) ($20,000). Total direct costs = $100,000.
Indirect costs: G&A overhead (20%) = $20,000.
Total costs: $120,000
Profit: 20% = $24,000.
Total bid price: $144,000

Variable Costs

Variable costs are costs that change with the volume of production.
Example: Producing mugs for $2 each; 500 units cost $1000, no units produced means zero variable cost.

Fixed Costs

Fixed costs do not vary with production volume—they remain constant regardless of output.
Example: Monthly rental of equipment ($10,000). The cost is the same even if 1 million or no units are produced.

Examples of Variable & Fixed Costs

Variable costs:
- Cost of materials
- Wages (hourly rate)
- Commissions/bonuses
Fixed costs:
- General management overheads
- Rental
- Administration costs
- Payroll
- License fees
- Insurance
- Taxation

Total Costs

Total costs = Variable costs + Fixed costs

Project Cost Management Processes

Project Cost Management includes planning, managing, and controlling costs to complete the project within the allocated budget.
Processes under Project Cost Management involve planning, estimating, determining budget, and controlling costs.

1-Plan Cost Management

Establishes policies, procedures, and documentation for managing project costs.
Addresses questions such as how to plan project costs and manage them to the cost baseline to effectively manage cost variances.
Involves determining funding sources (e.g., internal funds, equity, debt).
Decisions include purchasing or leasing equipment.

Cost Management Plan

The output of the Plan Cost Management process.
Includes a frequency of reporting, reporting formats, level of accuracy, rules of cost performance measurement, control thresholds, and control accounts.

2-Estimate Cost

Involves approximating monetary resources needed for each project activity.
Types of estimates include: rough order of magnitude (ROM), budget, and definitive, each with associated accuracy ranges.

Reserves

Calculating reserves is important part in project management planning.
Reserves provide a cushion against known and unknown project risks.
Without contingency and management reserves, a project manager cannot accurately estimate project costs and manage risks effectively.

Contingency Reserves

These reserves are used for identified risks.
Estimated based on risk management techniques.
Controlled by the project manager.

Management Reserves

Used for unidentified risks.
Determined by the organization’s policy (often a percentage of the total project cost or duration).
The project manager needs higher management approval to utilize this.

3-Determine Budget

Project manager calculates the total project cost to ascertain funding requirements for completion.
Process involves aggregating estimated costs of activities or work packages to create the authorized cost baseline.
Risk management analysis and reserve inclusion are essential in total project cost estimation.

Cost Budget

Activity cost estimates roll up to work package estimates, then to control account estimates, and finally to project costs, via the cost aggregation process.
Contingency and management reserves are added to the total estimated cost to form the cost baseline.

Cost Baseline

Cost baseline is the result of adding the contingency reserve to the cost estimate.
Project's performance is measured against the cost baseline, not the budget.

4-Control Costs

Project cost status monitoring and managing changes to the cost baseline are crucial.
Corrective or preventive actions are necessary when planned and actual values show variance.

Actions Undertaken to Control Costs

The project manager follows the Cost Management Plan to measure costs and identify variances.
Variances will require corrective/preventive actions.

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Description

Test your knowledge of key concepts in project cost management with this quiz. Explore the differences between direct and indirect costs, understand variable and fixed costs, and learn about the cost management plan process. Answer questions that challenge your understanding of managing costs in a project environment.