← PMP Exam: Cost & Budget

PMP Project Management Professional Exam Study Guide

Key concepts, definitions, and exam tips organized by topic.

28 cards covered

PMP Exam Study Guide: Cost & Budget


Overview

Cost and budget management is a critical knowledge area on the PMP exam, covering how projects are estimated, budgeted, tracked, and controlled. This guide covers four major domains: Cost Estimation, Budget & Baseline, Earned Value Management (EVM), and Cost Control, with a strong emphasis on formulas and their interpretations. Expect calculation-based scenario questions as well as conceptual application questions on the exam.


---


Cost Estimation


Summary

Cost estimation is the process of developing an approximation of the financial resources needed to complete project work. The accuracy of an estimate depends on the technique used and the information available at the time. Estimates evolve throughout the project lifecycle — from rough ballpark figures early on to more precise figures as scope is better defined.


Estimating Techniques


| Technique | Approach | Accuracy | Speed | When Used |

|---|---|---|---|---|

| Analogous | Top-down; uses historical data | Low | Fast | Early phases, limited info |

| Parametric | Statistical relationships (unit rates) | Medium–High | Moderate | When reliable models exist |

| Bottom-Up | Aggregates individual work package estimates | Highest | Slowest | When detailed scope is defined |

| PERT (Three-Point) | Weighted average of O, M, P | Higher than single-point | Moderate | When uncertainty is high |


Key Formulas


  • • PERT (Beta Distribution): `E = (O + 4M + P) / 6`
  • • PERT Standard Deviation: `σ = (P – O) / 6`
  • • PERT Variance: `σ² = [(P – O) / 6]²`

    • Estimate Accuracy Ranges


    | Estimate Type | Accuracy Range | Phase |

    |---|---|---|

    | Rough Order of Magnitude (ROM) | –25% to +75% | Initiating |

    | Budget Estimate | –10% to +25% | Planning |

    | Definitive Estimate | –5% to +10% | Later Planning/Execution |


    Cost Types


  • • Direct Costs: Expenses directly tied to the project (team salaries, materials, equipment)
  • • Indirect Costs: Shared overhead not specific to one project (utilities, administrative staff)
  • • Fixed Costs: Do not change with the amount of work (e.g., equipment lease)
  • • Variable Costs: Change based on production or consumption (e.g., hourly labor, materials)
  • • Sunk Costs: Money already spent and irrecoverable — should not influence future decisions

    • Reserve Analysis


  • • Contingency Reserves:

    • - Cover known-unknown risks (identified risks with uncertain outcomes)

    - Controlled by the project manager

    - Included in the cost baseline

  • • Management Reserves:

    • - Cover unknown-unknown risks (completely unforeseen events)

    - Controlled by senior management/sponsor

    - Excluded from the cost baseline


    Key Terms

  • • Analogous Estimating – Top-down estimate using historical data from similar projects
  • • Parametric Estimating – Uses statistical unit rates (e.g., cost per square foot)
  • • Bottom-Up Estimating – Most accurate; aggregates work package estimates upward
  • • PERT – Three-point weighted average formula accounting for optimism and pessimism
  • • ROM Estimate – Rough approximation used in early phases
  • • Contingency Reserve – Budget for known risks; within baseline
  • • Management Reserve – Budget for unknown risks; outside baseline

    • ⚠️ Watch Out For

  • • ROM accuracy range is asymmetric (–25% to +75%), not symmetric. Don't assume equal margins.
  • • PERT gives more weight to M (most likely) — the factor of 4 is key.
  • • Analogous ≠ Parametric: Analogous uses a whole past project as a reference; parametric uses a mathematical unit rate.
  • • Contingency reserves ARE in the baseline; management reserves are NOT.
  • • Sunk costs are irrelevant to future project decisions — don't let scenarios trick you into factoring them in.

    • ---


    Budget & Baseline


    Summary

    The Determine Budget process consolidates all individual cost estimates into an authorized, time-phased spending plan — the cost baseline. This baseline is the benchmark against which all future cost performance is measured.


    The Budget Hierarchy


    ```

    Project Budget

    ├── Cost Baseline ← Approved time-phased budget

    │ ├── Control Accounts

    │ │ └── Work Packages

    │ │ └── Activity Estimates

    │ └── Contingency Reserves (for known risks)

    └── Management Reserves (for unknown risks)

    ```


    Key Relationships & Formulas


  • • Project Budget = Cost Baseline + Management Reserves
  • • BAC (Budget at Completion) = Total authorized budget for the entire project
  • • The cost baseline is the authorized, time-phased spending plan used to measure performance
  • • The S-curve visually represents cumulative planned value (spending) over time

    • Key Terms

  • • Cost Baseline – Time-phased approved budget excluding management reserves; used for performance measurement
  • • Budget at Completion (BAC) – Total authorized project budget
  • • Determine Budget – The process that produces the cost baseline
  • • Funding Limit Reconciliation – Aligning planned spending with organizational funding constraints
  • • S-Curve – Graphical representation of cumulative costs over time

    • ⚠️ Watch Out For

  • • BAC ≠ Project Budget: BAC is the total budget for work; the overall project budget also includes management reserves.
  • • The PM controls contingency reserves but must get sponsor/senior management approval to use management reserves.
  • • The cost baseline excludes management reserves — this is a frequent trap question.
  • • Determine Budget (not Estimate Costs) is what produces the cost baseline.

    • ---


    Earned Value Management (EVM)


    Summary

    EVM is an integrated performance measurement technique that compares planned work, completed work, and actual costs to provide objective measures of schedule and cost performance. It uses three core data points — PV, EV, and AC — to calculate variances and performance indices.


    The Three Core EVM Values


    | Term | Acronym | Old Name | Definition |

    |---|---|---|---|

    | Planned Value | PV | BCWS | Budgeted cost of work scheduled — what you planned to spend by now |

    | Earned Value | EV | BCWP | Budgeted cost of work performed — value of work actually completed |

    | Actual Cost | AC | ACWP | Actual cost incurred for work performed — what you actually spent |


    > 💡 Memory Tip: EV is always in the middle — it compares against both PV (for schedule) and AC (for cost).


    EVM Formulas at a Glance


    #### Variances (Negative = Bad)


    | Formula | Name | Result Interpretation |

    |---|---|---|

    | CV = EV – AC | Cost Variance | Negative = Over Budget |

    | SV = EV – PV | Schedule Variance | Negative = Behind Schedule |


    #### Performance Indices (< 1.0 = Bad, > 1.0 = Good)


    | Formula | Name | Result Interpretation |

    |---|---|---|

    | CPI = EV / AC | Cost Performance Index | < 1.0 = Over Budget; > 1.0 = Under Budget |

    | SPI = EV / PV | Schedule Performance Index | < 1.0 = Behind Schedule; > 1.0 = Ahead |


    Interpreting CPI and SPI Values


    | CPI Value | Meaning |

    |---|---|

    | CPI = 1.0 | Exactly on budget — $1 earned for every $1 spent |

    | CPI = 0.85 | Over budget — only $0.85 earned per $1 spent |

    | CPI = 1.15 | Under budget — $1.15 earned per $1 spent |


    | SPI Value | Meaning |

    |---|---|

    | SPI = 1.0 | Exactly on schedule |

    | SPI = 0.90 | Behind schedule — only 90% of planned work accomplished |

    | SPI = 1.20 | Ahead of schedule — 20% more work done than planned |


    Key Terms

  • • Planned Value (PV) – Budgeted cost for scheduled work at a point in time
  • • Earned Value (EV) – Budgeted value of work actually completed
  • • Actual Cost (AC) – Real money spent to date
  • • Cost Variance (CV) – EV – AC; negative = over budget
  • • Schedule Variance (SV) – EV – PV; negative = behind schedule
  • • CPI – Cost efficiency ratio (EV/AC)
  • • SPI – Schedule efficiency ratio (EV/PV)

    • ⚠️ Watch Out For

  • • EV is always the numerator in indices and always the first term in variances — don't flip it.
  • • SV is expressed in dollars, not time — a negative SV doesn't directly tell you how many days behind you are.
  • • SPI eventually approaches 1.0 at project end (all planned work gets done), making it less useful late in the project. CPI remains meaningful throughout.
  • • A project can be ahead of schedule AND over budget — always analyze CPI and SPI together.
  • • AC has no target — it is simply what was spent; it cannot be "good" or "bad" on its own without context.

    • ---


    Forecasting


    Summary

    Forecasting formulas project where the project will end up based on current performance. The key question is: "What assumptions are we making about future performance?" The answer determines which EAC formula to use.


    EAC Formulas — Choosing the Right One


    | Scenario / Assumption | EAC Formula |

    |---|---|

    | Current variances are atypical; future work proceeds at planned rate | `EAC = AC + (BAC – EV)` |

    | Current CPI will continue for the rest of the project (most common) | `EAC = BAC / CPI` |

    | Both CPI and SPI will influence remaining work | `EAC = AC + [(BAC – EV) / (CPI × SPI)]` |

    | New ETC estimate provided by the team | `EAC = AC + ETC` |


    ETC Formulas


    | Scenario | ETC Formula |

    |---|---|

    | Future work at current CPI | `ETC = (BAC – EV) / CPI` |

    | Future work at planned rate (variances atypical) | `ETC = BAC – EV` |

    | New bottom-up re-estimate | ETC = New estimate from team |


    VAC and TCPI


    | Formula | Name | Interpretation |

    |---|---|---|

    | VAC = BAC – EAC | Variance at Completion | Negative = projected to finish over budget |

    | TCPI (BAC) = (BAC – EV) / (BAC – AC) | To-Complete Performance Index | Efficiency needed to meet original budget |

    | TCPI (EAC) = (BAC – EV) / (EAC – AC) | To-Complete Performance Index | Efficiency needed to meet new approved EAC |


    TCPI Interpretation


    | TCPI Value | Meaning |

    |---|---|

    | TCPI = 1.0 | Remaining work must be done at exactly the planned efficiency |

    | TCPI > 1.0 | Remaining work must be done more efficiently than planned — harder goal |

    | TCPI < 1.0 | Remaining work can be done less efficiently than planned — easier goal |


    > 💡 Key Relationship: If current CPI < 1.0 (over budget), TCPI based on BAC will be > 1.0 — confirming the project needs to improve efficiency to recover. If TCPI is significantly greater than CPI, the budget goal may be unrealistic.


    Key Terms

  • • EAC (Estimate at Completion) – Projected total cost at project completion
  • • ETC (Estimate to Complete) – Expected cost to finish all remaining work
  • • VAC (Variance at Completion) – BAC – EAC; projected budget surplus/deficit
  • • TCPI – The cost efficiency that must be achieved on remaining work to meet budget

    • ⚠️ Watch Out For

  • • The most common EAC formula on the exam is `BAC / CPI` — used when current efficiency is expected to continue.
  • • Use TCPI (EAC) only when the original BAC is no longer valid and a new budget has been formally approved.
  • • VAC is always BAC – EAC, not EV – AC (that's CV) — don't confuse them.
  • • ETC ≠ EAC: ETC is the cost to finish remaining work; EAC is the total projected cost at completion.
  • • Know which EAC formula to use based on the scenario description — the exam will describe the assumption, not state it directly.

    • ---


    Cost Control


    Summary

    The Control Costs process monitors project spending, manages changes to the cost baseline through integrated change control, and analyzes variances to determine corrective or preventive actions. It relies heavily on EVM data to make informed decisions.


    Key Concepts


  • • Integrated Change Control: Any changes to the cost baseline must go through the formal change control process — the PM cannot unilaterally change the baseline.
  • • Variance Analysis: Determines the cause and magnitude of cost variances and decides if corrective action is needed.
  • • Funding Limit Reconciliation: When cumulative spending approaches a funding limit set by the sponsor or organization, the project schedule may need to be adjusted to delay spending — often called "re-profiling."

    • Gold Plating vs. Scope Creep


    | Issue | Description | Who Causes It |

    |---|---|---|

    | Gold Plating | Team adds unrequested features/quality beyond agreed scope | Project Team |

    | Scope Creep | Uncontrolled additions to scope without formal change control | Stakeholders / PM |


    Both consume budget without delivering approved value and must be actively prevented.


    Key Terms

  • • Control Costs – Process of monitoring and managing project spending against the baseline
  • • Gold Plating – Adding unauthorized extras; wastes budget and may introduce risk
  • • Funding Limit Reconciliation – Aligning expenditures with organizational funding constraints
  • • Variance Analysis – Comparing planned vs. actual performance to identify gaps and causes
  • • Integrated Change Control – Formal process for reviewing and approving baseline changes

    • ⚠️ Watch Out For

  • • Gold plating is done by the project team — it's not the same as scope creep (which typically originates from stakeholders).
  • • The project manager controls contingency reserves but must escalate to access management reserves.
  • • Cost baseline changes require formal change control — a PM cannot adjust the baseline informally, even for small amounts.
  • • Funding limit reconciliation adjusts the schedule, not necessarily the budget — spending is spread out over time.

    • ---


    Master Formula Reference Sheet


    | Formula | Name |

    |---|---|

    | `E = (O + 4M + P) / 6` | PERT Estimate (Beta) |

    | `σ = (P – O) / 6` | PERT Standard Deviation |

    | `Project Budget = Cost Baseline + Management Reserves` | Budget Hierarchy |

    | `CV = EV – AC` | Cost Variance |

    | `SV = EV – PV` | Schedule Variance |

    | `CPI = EV / AC` | Cost Performance Index |

    | `SPI = EV / PV` | Schedule Performance Index |

    | `EAC = AC + (BAC – EV)` | EAC (atypical variances) |

    | `EAC = BAC / CPI` | EAC (current CPI continues) |

    | `EAC = AC + ETC` | EAC (new ETC estimate) |

    | `ETC = (BAC – EV) / CPI` | ETC (at current CPI) |

    | `VAC = BAC – EAC` | Variance at Completion |

    | `TCPI = (BAC – EV) / (BAC – AC)` | TCPI (based on BAC) |

    | `TCPI = (BAC – EV) / (EAC – AC)` | TCPI (based on EAC) |


    ---


    Quick Review Checklist


  • • [ ] I can name and describe the four main estimating techniques and their
    • 📝

    Take a Practice Test

    Test yourself with multiple choice questions
    📇

    Study with Flashcards

    Flip through all 28 cards

    Want more study tools?

    Subscribe for $7.99/mo and turn your own notes into personalized flashcards and study guides.

    View Pricing