Cost Management: Estimation Techniques, Budgeting and Earned Value Management (EVM) Basics

Meaning of cost management

Cost management ensures the project is planned and executed within the approved budget.

It includes:

• estimating costs
• determining budget (cost baseline)
• controlling costs during execution

Good cost management avoids overruns and improves profitability/value.

Cost estimation vs budgeting vs cost control

• Cost estimation: predicting cost of resources/activities.
• Budgeting: allocating estimated costs to time periods and forming cost baseline.
• Cost control: monitoring actual costs, comparing with baseline, and taking corrective actions.

Cost types: direct/indirect, fixed/variable

• Direct costs: directly attributable (labour, materials).

• Indirect costs: shared overhead (rent, admin).

• Fixed costs: do not change with output (rent).

• Variable costs: change with output (raw material).

Cost estimation techniques (overview)

Common techniques:

• analogous
• parametric
• bottom-up
• three-point

Choose based on availability of data and required accuracy.

Analogous estimation

Uses cost of similar past projects as reference.

• quick and less expensive
• less accurate (depends on similarity and expert judgement)

Parametric estimation

Uses statistical relationship. Example: cost per unit × number of units.

• more accurate when good data exists

Bottom-up estimation

Estimate costs at work package/activity level and roll up.

• high accuracy
• takes more time and detailed data

Three-point estimation (basic idea)

Uses:

• optimistic (O)
• most likely (M)
• pessimistic (P)

Expected estimate (simple PERT-style):

• E = (O + 4M + P)/6

This reduces bias and accounts for uncertainty.

Budgeting and cost baseline

Budgeting allocates approved costs over time.

Cost baseline is the approved budget (time-phased) used for control.

Think: estimates → budget → baseline → control.

Earned Value Management (EVM): meaning

EVM is a technique to measure project performance by integrating:

• scope
• schedule
• cost

It compares what was planned, what was accomplished, and what it actually cost.

Key EVM terms: PV, EV, AC, BAC

• PV (Planned Value): budgeted cost of work scheduled.
• EV (Earned Value): budgeted cost of work actually performed.
• AC (Actual Cost): actual cost incurred.
• BAC (Budget at Completion): total approved budget.

EVM variances: CV and SV

• Cost Variance (CV) = EV − AC
• Schedule Variance (SV) = EV − PV

Interpretation:

• CV > 0 → under budget
• CV < 0 → over budget
• SV > 0 → ahead of schedule
• SV < 0 → behind schedule

EVM performance indexes: CPI and SPI

• CPI (Cost Performance Index) = EV / AC
• SPI (Schedule Performance Index) = EV / PV

Interpretation:

• CPI > 1 → cost efficient (under budget)
• CPI < 1 → cost overrun
• SPI > 1 → ahead of schedule
• SPI < 1 → behind schedule

Quick interpretation rules (exam-friendly)

Remember:

• Variance uses subtraction (positive is good).
• Index uses division (more than 1 is good).

Mini worked example (small numbers)

Suppose:

• PV = 100
• EV = 80
• AC = 90

Then:

• CV = EV − AC = 80 − 90 = −10 (over budget)
• SV = EV − PV = 80 − 100 = −20 (behind schedule)
• CPI = EV/AC = 80/90 = 0.89 (cost overrun)
• SPI = EV/PV = 80/100 = 0.80 (behind schedule)

So project is both behind schedule and over budget.

Common mistakes in EVM

• mixing PV and EV meanings
• wrong sign interpretation for CV/SV
• treating CPI/SPI as percentage without converting
• using AC in schedule formula or PV in cost formula incorrectly

Mini tables/flowcharts for exam answers

Estimation technique comparison

EVM formula table

Cost control flow

Estimate → Budget/Baseline → Track actuals → Compare (EVM) → Corrective action

Quick Recap (1-minute revision)

• Cost management = estimate + budget + control.
• Techniques: analogous, parametric, bottom-up, three-point.
• EVM integrates scope, time, cost.
• PV/EV/AC are core terms; BAC is total budget.
• CV=EV−AC, SV=EV−PV; CPI=EV/AC, SPI=EV/PV (positive/>1 is good).