Cost Estimation and Budgeting
What the domain is really testing
This domain tests the accuracy hierarchy of estimates and the arithmetic of cost control. Know analogous (top-down, fast, low accuracy), parametric (unit rate × driver), bottom-up (most accurate, slowest), and three-point/PERT estimating. Understand the cost baseline (approved budget excluding management reserve), contingency reserve (for identified risks, owned by the project manager) and management reserve (for unknown unknowns, owned by the sponsor).
Concepts to hold firmly
- Cost of quality has prevention, appraisal, and failure costs; failure costs include rework and warranty.
- Life-cycle costing includes operation and disposal, not just build.
- Earned value terms: PV, EV, AC; CV = EV − AC; SV = EV − PV; CPI = EV/AC; SPI = EV/PV; EAC and ETC.
- Sunk costs are irrelevant to forward decisions.
Traps
Questions love to ask whether a variance is a cost or schedule problem: a negative SV with a healthy CPI means the schedule is behind but spending is efficient. Another trap is treating contingency reserve as available for scope changes - it is not; scope changes go through change control and may draw on management reserve. Watch for CPI below 1 being described as "under budget"; it means overspend.
Rule of thumb
CPI or SPI below 1.0 is adverse; above 1.0 is favourable. Always divide EV by the index denominator, never the reverse.
Worked example
PV = 200, EV = 180, AC = 210. CV = 180 − 210 = −30 (over budget). SV = 180 − 200 = −20 (behind schedule). CPI = 0.857, SPI = 0.90. Forecast EAC (atypical variance) = AC + (BAC − EV).