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8.4 Cost Management

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Project Management Professional PMP

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1 Chapter 1: Introduction & Fundamentals

1.1 About the PMP Exam 1.2 What is a Project? 1.3 Project, Program & Portfolio Management 1.4 The Project Manager Role 1.5 PMBOK 7 Principles Overview 1.6 Performance Domains Overview 1.7 What Changed in the July 2026 PMP Exam

2 Chapter 2: People Domain Part 1

2.1 Managing Conflict 2.2 Leading a Team 2.3 Supporting Team Performance 2.4 Empowering Team Members 2.5 Training & Development 2.6 Building a Team 2.7 Removing Impediments

3 Chapter 3: People Domain Part 2

3.1 Negotiating Project Agreements 3.2 Collaborating with Stakeholders 3.3 Building Shared Understanding 3.4 Engaging Virtual Teams 3.5 Defining Team Ground Rules 3.6 Mentoring Stakeholders 3.7 Emotional Intelligence

4 Chapter 4: Process Domain - Planning

4.1 Determining Project Methodology 4.2 Integrating Project Planning 4.3 Planning & Managing Scope 4.4 Planning & Managing Schedule 4.5 Planning & Managing Budget 4.6 Planning & Managing Quality 4.7 Planning & Managing Resources 4.8 Planning & Managing Procurement

5 Chapter 5: Process Domain - Execution & Control

5.1 Executing with Urgency for Value 5.2 Managing Communications 5.3 Assessing & Managing Risks 5.4 Engaging Stakeholders 5.5 Managing Project Changes 5.6 Establishing Project Governance 5.7 Managing Project Issues 5.8 Managing Project Artifacts 5.9 Knowledge Transfer & Closure

6 Chapter 6: Business Environment Domain

6.1 Planning & Managing Compliance 6.2 Evaluating & Delivering Benefits 6.3 External Environment Changes 6.4 Supporting Organizational Change

7 Chapter 7: Agile & Hybrid Approaches

7.1 Agile Mindset & Values 7.2 Scrum Framework 7.3 Kanban & Lean 7.4 Extreme Programming (XP) 7.5 Hybrid Project Management 7.6 Agile Planning & Estimation 7.7 Agile Metrics & Tools

8 Chapter 8: Predictive (Waterfall) Approaches

8.1 Predictive Lifecycle 8.2 Scope Management 8.3 Schedule Management 8.4 Cost Management 8.5 Quality Management 8.6 Risk Management Process 8.7 Procurement & Contracts 8.8 Change Control

8.4 Cost Management

Key Takeaways Explain This Topic AI

Earned Value Management (EVM) integrates scope, schedule, and cost data to measure project performance objectively

CPI (Cost Performance Index) = EV/AC measures cost efficiency; CPI > 1.0 means under budget, CPI < 1.0 means over budget

SPI (Schedule Performance Index) = EV/PV measures schedule efficiency; SPI > 1.0 means ahead of schedule

EAC (Estimate at Completion) = BAC/CPI forecasts total project cost if current cost trends continue

TCPI (To-Complete Performance Index) calculates the efficiency needed for remaining work to meet budget or revised estimate

Last updated: January 2026

Cost management involves planning, estimating, budgeting, financing, funding, managing, and controlling costs so the project can be completed within the approved budget. In predictive projects, the cost baseline is established during planning and managed through earned value techniques.

Cost Management Processes

  • Process Purpose Key Output
  • Plan Cost Management Define policies and procedures Cost Management Plan
  • Estimate Costs Develop cost approximations Activity Cost Estimates
  • Determine Budget Establish authorized cost baseline Cost Baseline
  • Control Costs Monitor status and manage changes Work Performance Information
  • Cost Estimating Techniques
  • Estimation Methods Comparison
  • Technique Description Accuracy When to Use
  • Analogous (Top-Down) Use similar past project data -25% to +75% Early estimates, limited data
  • Parametric Use statistical relationships -10% to +25% When parameters are known
  • Bottom-Up Estimate each work package, aggregate -5% to +10% Detailed planning phase
  • Three-Point Use optimistic, most likely, pessimistic Varies When uncertainty exists
  • Three-Point Estimating Formulas
  • Distribution Formula Use Case
  • Triangular E = (O + M + P) / 3 Equal weight to all estimates
  • Beta (PERT) E = (O + 4M + P) / 6 More weight to most likely
  • Standard Deviation SD = (P - O) / 6 Measure of uncertainty
  • Variance V = [(P - O) / 6]^2 For summing uncertainties
  • Example: Three-Point Estimate
  • Estimate Type Days
  • Optimistic (O) 4
  • Most Likely (M) 6
  • Pessimistic (P) 14
  • Beta (PERT) Estimate = (4 + 4(6) + 14) / 6 = (4 + 24 + 14) / 6 = 42/6 = 7 days
  • Standard Deviation = (14 - 4) / 6 = 10/6 = 1.67 days
  • Cost Baseline and Budget
  • Components of Project Budget
  • Component Description
  • Activity Cost Estimates Cost for each work package
  • Contingency Reserves Known-unknown risks (part of baseline)
  • Cost Baseline Authorized time-phased budget
  • Management Reserves Unknown-unknown risks (not in baseline)
  • Project Budget Cost Baseline + Management Reserves
  • Earned Value Management (EVM)

EVM is a methodology that integrates scope, schedule, and cost data to measure project performance objectively. It answers three fundamental questions:

Where are we compared to where we planned to be?

How efficiently are we using our resources?

What do we expect the project to cost at completion?

Core EVM Values

  • Metric Formula Description
  • PV (Planned Value) From schedule baseline Value of work PLANNED to be done
  • EV (Earned Value) % Complete x BAC Value of work ACTUALLY done
  • AC (Actual Cost) From accounting Cost ACTUALLY incurred
  • BAC (Budget at Completion) Original budget Total budgeted cost for the project
  • Understanding EV
  • EV answers: "What is the budgeted value of the work we've actually completed?"
  • Example: If a $100,000 project is 40% complete, EV = $40,000
  • EVM Variance Analysis
  • Variance Formulas
  • Variance Formula Interpretation
  • CV (Cost Variance) EV - AC Positive = Under budget
  • SV (Schedule Variance) EV - PV Positive = Ahead of schedule
  • Variance Example
  • Metric Value
  • BAC $100,000
  • PV (Planned) $50,000
  • EV (Earned) $45,000
  • AC (Actual) $60,000
  • CV = EV - AC = $45,000 - $60,000 = -$15,000 (Over budget by $15,000)
  • SV = EV - PV = $45,000 - $50,000 = -$5,000 (Behind schedule by $5,000 of work)
  • EVM Performance Indices
  • Index Formulas
  • Index Formula Interpretation
  • CPI (Cost Performance Index) EV / AC > 1.0 = Under budget
  • SPI (Schedule Performance Index) EV / PV > 1.0 = Ahead of schedule
  • Memory Aid for Interpretation
  • Index Value Cost (CPI) Schedule (SPI)
  • > 1.0 Under budget Ahead of schedule
  • = 1.0 On budget On schedule
  • < 1.0 Over budget Behind schedule
  • Index Example (Using Previous Values)
  • CPI = EV / AC = $45,000 / $60,000 = 0.75 (For every $1 spent, only $0.75 of value earned)
  • SPI = EV / PV = $45,000 / $50,000 = 0.90 (Only 90% of planned work completed)
  • EVM Forecasting
  • Estimate at Completion (EAC) Formulas
  • Scenario Formula When to Use
  • Atypical Variance EAC = AC + (BAC - EV) Past variances won't continue
  • Typical Variance EAC = BAC / CPI Current cost trends will continue
  • Schedule & Cost Impact EAC = AC + [(BAC - EV) / (CPI x SPI)] Both affect remaining work
  • Bottom-Up Re-estimate EAC = AC + ETC When original estimate is flawed
  • Other Forecasting Formulas
  • Metric Formula Description
  • ETC (Estimate to Complete) EAC - AC Cost needed to finish remaining work
  • VAC (Variance at Completion) BAC - EAC Expected over/under run at completion
  • Forecasting Example

Using CPI = 0.75, BAC = $100,000, EV = $45,000, AC = $60,000:

  • EAC = BAC / CPI = $100,000 / 0.75 = $133,333
  • ETC = EAC - AC = $133,333 - $60,000 = $73,333
  • VAC = BAC - EAC = $100,000 - $133,333 = -$33,333 (Expected $33,333 over budget)
  • To-Complete Performance Index (TCPI)

TCPI calculates the cost performance required for remaining work to meet a target:

TCPI Formulas

  • Target Formula Use
  • Meet BAC TCPI = (BAC - EV) / (BAC - AC) To finish within original budget
  • Meet EAC TCPI = (BAC - EV) / (EAC - AC) To finish at revised estimate
  • TCPI Interpretation
  • TCPI Value Meaning
  • > 1.0 Must be MORE efficient to meet target (harder)
  • = 1.0 Continue at same efficiency
  • < 1.0 Can be LESS efficient and still meet target (easier)
  • TCPI Example
  • BAC = $100,000, EV = $45,000, AC = $60,000

TCPI to meet BAC = (BAC - EV) / (BAC - AC) = ($100,000 - $45,000) / ($100,000 - $60,000) = $55,000 / $40,000 = 1.375

Interpretation: Must achieve CPI of 1.375 on remaining work to meet original budget — very challenging!

Complete EVM Formula Reference

  • Acronym Name Formula Interpretation
  • PV Planned Value Schedule baseline Work planned
  • EV Earned Value % Complete x BAC Work done
  • AC Actual Cost Accounting data Cost incurred
  • BAC Budget at Completion Original budget Total budget
  • CV Cost Variance EV - AC +/- = Under/Over
  • SV Schedule Variance EV - PV +/- = Ahead/Behind
  • CPI Cost Performance Index EV / AC > 1 = Under budget
  • SPI Schedule Performance Index EV / PV > 1 = Ahead
  • EAC Estimate at Completion BAC / CPI (typical) Forecast total cost
  • ETC Estimate to Complete EAC - AC Remaining cost
  • VAC Variance at Completion BAC - EAC Over/Under at end
  • TCPI To-Complete Performance Index (BAC-EV)/(BAC-AC) Required efficiency
  • Key Takeaways
  • EVM integrates scope, schedule, and cost for objective performance measurement
  • EV (Earned Value) = % Complete x BAC represents the value of work accomplished
  • CPI = EV/AC measures cost efficiency (> 1.0 = under budget)
  • SPI = EV/PV measures schedule efficiency (> 1.0 = ahead of schedule)
  • EAC = BAC/CPI forecasts final cost if current trends continue
  • TCPI shows the efficiency required on remaining work to meet a target

EVM Example: Project at Reporting Date ($)