1
What are the three types of cost estimates, and how accurate is each one?
Table + Definitions▾
~15 marks
Project managers prepare three types of cost estimates, depending on how early in the project life cycle the estimate is made:
| Type of Estimate | When Done | Why Done | Typical Accuracy |
|---|---|---|---|
| Rough Order of Magnitude (ROM) | Very early, often 3–5 years before completion | Helps make project selection decisions (a.k.a. ballpark estimate / guesstimate) | -25% to +75% |
| Budgetary | Early, 1–2 years before completion | Puts dollars into the organization's budget plans | -10% to +25% |
| Definitive | Later in the project, less than 1 year out | Provides details for purchasing decisions and final cost estimates | -5% to +10% |
Exam tip: The definitive estimate is the most accurate of the three, since it is prepared closest to project completion when the most information is known.
2
Describe the four basic cost estimation tools and techniques. Which one avoids the limits of human decision-making?
List + Explain▾
4 × 4 = 16 marks
- Analogous (top-down) estimates — use the actual cost of a previous, similar project as the basis for the current estimate. Requires expert judgment; less costly to develop but less accurate.
- Bottom-up (activity-based) estimates — estimate individual work items/activities (often from the WBS) and sum them for a project total. More accurate, but time-intensive and expensive to develop.
- Parametric modeling — uses project characteristics (parameters) in a mathematical model to estimate costs, e.g. cost per line of code.
- Computerized tools — spreadsheets and project management software that make working with estimates easier.
COCOMO: Barry Boehm's Constructive Cost Model estimates software development costs using parameters such as Function Points and Source Lines of Code (SLOC). Boehm noted that only parametric models avoid the limits of human decision-making, since they rely on formulas rather than subjective judgment.
3
Explain: tangible vs. intangible cost, direct vs. indirect cost, sunk cost, and reserves — with an example each.
Definitions + Examples▾
~20 marks
- Tangible costs/benefits — easily measured in monetary terms (e.g., cost of the development team, cost of servers).
- Intangible costs/benefits — difficult to measure in monetary terms (e.g., the cost of a defect found late in a project).
- Direct costs — directly related to producing the project's products/services (e.g., team salaries, project servers). Managers have more control over these.
- Indirect costs — not directly related to the product/service but incurred to support the project (e.g., electricity, administration). Managers have less control over these.
- Sunk cost — money already spent in the past; must not be considered when deciding whether to invest in or continue a project.
- Reserves — dollars included in a cost estimate to mitigate risk from unpredictable events.
- Contingency reserves — for partially planned situations ("known unknowns"); included in the cost baseline.
- Management reserves — for completely unpredictable situations ("unknown unknowns").
Common exam trap: Management reserves are not for planned risks (that's the contingency reserve). Also, "contingency reserve" and "contingency allowance" are the same concept, not two separate types of fund.
4
A task's baseline budget was $10,000, planned for one week. At the end of Week 1 it is only 50% complete, and $15,000 has actually been spent. Calculate PV, EV, AC, CV, SV, CPI and SPI, and interpret the results.
Calculation▾
~15 marks
Given: PV = $10,000, Rate of Performance (RP) = 50%, AC = $15,000
EV = PV × RP = 10,000 × 50% = $5,000
CV = EV − AC = 5,000 − 15,000 = -$10,000
SV = EV − PV = 5,000 − 10,000 = -$5,000
CPI = EV / AC = 5,000 / 15,000 = 0.33 (33%)
SPI = EV / PV = 5,000 / 10,000 = 0.50 (50%)
CV = EV − AC = 5,000 − 15,000 = -$10,000
SV = EV − PV = 5,000 − 10,000 = -$5,000
CPI = EV / AC = 5,000 / 15,000 = 0.33 (33%)
SPI = EV / PV = 5,000 / 10,000 = 0.50 (50%)
Interpretation:
- Negative CV → work performed cost more than planned (over budget).
- Negative SV → task is behind schedule.
- CPI < 1 → project is over budget; every $1 spent returns only $0.33 of planned value.
- SPI < 1 → project is behind schedule; only half the planned work is complete.
Rule of thumb: CPI/SPI = 1 → on target · > 1 → ahead / under budget · < 1 → behind / over budget.
5
What are Estimate at Completion (EAC) and To-Complete Performance Index (TCPI)? If BAC = $100,000 and CPI = 0.8, find the EAC.
Forecasting▾
~15 marks
- Budget at Completion (BAC) — the original total budget approved for the project; not adjusted for current performance.
- Estimate at Completion (EAC) — the forecasted total cost of the project based on performance to date.
- Estimate to Complete (ETC) — the estimated additional cost needed from now until completion.
- To-Complete Performance Index (TCPI) — shows how efficient the team must be for the rest of the project to finish within budget (ratio of work remaining to money remaining).
EAC = BAC / CPI
ETC = EAC − AC
TCPI = (BAC − EV) / (BAC − AC)
VAC (Variance at Completion) = BAC − EAC
ETC = EAC − AC
TCPI = (BAC − EV) / (BAC − AC)
VAC (Variance at Completion) = BAC − EAC
Worked example: BAC = $100,000, CPI = 0.8
EAC = 100,000 / 0.8 = $125,000
If the current rate of cost inefficiency continues, the project is forecast to cost $125,000 instead of $100,000 — a $25,000 unfavourable variance at completion (VAC = 100,000 − 125,000 = -$25,000).
Exam tip: A similar formula applies to time:
EAC(Time) = BAC(Time) / SPI. An EAC point above and to the right of the BAC point on an S-curve chart means the project is projected to cost more and take longer than planned.