Cost Management
Know your EVM formulas cold — they will be on the exam
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Overview
Cost Management is the most formula-intensive knowledge area on the PMP exam. Earned Value Management (EVM) is the centerpiece: a set of metrics that integrates scope, schedule, and cost performance into a single reporting framework. Understanding EVM means understanding whether a project is on budget (Cost Variance), on schedule (Schedule Variance), and forecasting accurately (Estimate at Completion). Every calculation flows from three fundamental values: Planned Value (PV), Earned Value (EV), and Actual Cost (AC).
The four Cost Management processes flow logically: first define how you'll manage costs (Plan Cost Management), then estimate what things will cost (Estimate Costs), then approve a total budget (Determine Budget, which produces the cost baseline), and finally track actuals against that baseline (Control Costs, where all EVM calculations live). The cost baseline is the time-phased budget approved for the project, excluding management reserves.
Forecasting is where many candidates stumble. There are three main Estimate at Completion (EAC) formulas, each appropriate for different assumptions: if past performance is a reliable predictor, use BAC/CPI; if the original estimate was flawed and future work will be re-estimated, use AC + (BAC − EV); if both CPI and SPI predict future performance, use AC + [(BAC − EV) / (CPI × SPI)]. The exam will tell you which assumption applies — you just need to know which formula matches.
Must Know at a Glance
| Term / Concept | Definition |
|---|---|
| BAC | Budget at Completion — the total approved budget for the project. |
| PV | Planned Value — the authorized budget assigned to scheduled work (what you planned to have done by now). |
| EV | Earned Value — the authorized budget for work actually completed (what you've actually accomplished in dollar terms). |
| AC | Actual Cost — the actual costs incurred for work performed during a given period. |
| CV | Cost Variance = EV − AC. Positive = under budget. Negative = over budget. |
| SV | Schedule Variance = EV − PV. Positive = ahead of schedule. Negative = behind schedule. |
| CPI | Cost Performance Index = EV/AC. >1 = under budget. <1 = over budget. |
| SPI | Schedule Performance Index = EV/PV. >1 = ahead. <1 = behind. |
| EAC | Estimate at Completion — forecast of total project cost. Multiple formulas depending on assumptions. |
| ETC | Estimate to Complete — expected cost to finish remaining work: (BAC − EV) / CPI. |
| VAC | Variance at Completion = BAC − EAC. Positive = under budget at end. Negative = over. |
| TCPI | To-Complete Performance Index — efficiency needed to complete within BAC: (BAC − EV) / (BAC − AC). |
Process Sequence
These processes run in order — each one builds on the outputs of the previous.
- 1
Plan Cost Management
Establishes policies and procedures for estimating, budgeting, and controlling project costs.
- 2
Estimate Costs
Developing an approximation of monetary resources needed for project activities.
- 3
Determine Budget
Aggregating estimated costs to establish an authorized cost baseline.
- 4
Control Costs
Monitoring project cost status; updating the cost baseline; managing changes.
Key Formulas
Cost Variance
CV = EV − AC
Negative = over budget. Remember: EV always comes first in variance formulas.
Schedule Variance
SV = EV − PV
Negative = behind schedule. Dollar-denominated, not time-denominated.
Cost Performance Index
CPI = EV / AC
>1 = under budget (good). <1 = over budget (bad).
Schedule Performance Index
SPI = EV / PV
>1 = ahead of schedule (good). <1 = behind (bad).
EAC (if CPI holds)
EAC = BAC / CPI
Use when past performance is expected to continue.
EAC (original estimate flawed)
EAC = AC + (BAC − EV)
Use when the original estimate was wrong; future work at planned rate.
EAC (both variances apply)
EAC = AC + [(BAC − EV) / (CPI × SPI)]
Use when both cost and schedule efficiency predict future performance.
Estimate to Complete
ETC = EAC − AC or (BAC − EV) / CPI
Remaining work cost. EAC − AC if EAC is known.
Variance at Completion
VAC = BAC − EAC
Positive = will finish under budget. Negative = will overrun.
TCPI (to meet BAC)
TCPI = (BAC − EV) / (BAC − AC)
Efficiency needed on remaining work to stay within original budget.
Exam Strategy
How to approach these questions
EVM questions have a reliable pattern. Step 1: identify PV, EV, and AC from the question. Step 2: determine what is being asked (CV, CPI, EAC, etc.). Step 3: apply the formula. Memory trick for variances: EV minus the "other thing" (Cost Variance = EV − AC; Schedule Variance = EV − PV). For EAC: the exam tells you the assumption — read carefully. "Atypical variance" = EAC = AC + (BAC − EV). "CPI will continue" = EAC = BAC/CPI. A CPI > 1 always means under budget; SPI > 1 always means ahead of schedule.
Common Mistakes
- ✕Using PV − EV or AC − EV for variances — always start with EV.
- ✕Choosing the wrong EAC formula — read the scenario carefully for the stated assumption.
- ✕Confusing EAC (forecast at completion) with ETC (remaining cost to finish).
- ✕Forgetting that cost baseline excludes management reserves (reserves live above the baseline).
All 30 Topics in This Domain
Click any topic for the full explanation, key points, exam tips, and FAQs.
Plan Cost Management
Plan Cost Management is the process of defining how project costs will be estimated, budgeted, managed, monitored, and controlled.
Cost Management Plan
The cost management plan is a component of the project management plan that describes how project costs will be planned, structured, estimated, budgeted, and controlled.
Estimate Costs
Estimate Costs is the process of developing an approximate monetary assessment of the resources needed to complete project activities.
Analogous Cost Estimating
Analogous cost estimating uses the cost of a previous, similar project or activity as the basis for estimating the cost of the current project or activity.
Parametric Cost Estimating
Parametric cost estimating uses a statistical relationship between historical data and other variables to calculate a cost estimate for project work.
Bottom-Up Cost Estimating
Bottom-up cost estimating involves estimating the cost of individual work packages or activities and then aggregating those estimates to arrive at a total project cost.
Three-Point Cost Estimating
Three-point cost estimating improves the accuracy of single-point estimates by considering estimation uncertainty and risk through optimistic, most likely, and pessimistic cost values.
Reserve Analysis
Reserve analysis is a technique used to determine the amount of contingency and management reserves needed for a project to account for cost uncertainty and risk.
Contingency Reserves
Contingency reserves are budget amounts allocated within the cost baseline to address identified risks that have been accepted and for which contingent or mitigating responses have been developed.
Management Reserves
Management reserves are budget amounts set aside for unforeseen work within the scope of the project, intended to address unknown risks that cannot be predicted during planning.
Determine Budget
Determine Budget is the process of aggregating the estimated costs of individual activities or work packages to establish an authorized cost baseline.
Cost Baseline
The cost baseline is the approved version of the time-phased project budget, excluding management reserves, used as a reference for measuring and monitoring cost performance.
Project Budget
The project budget is the total authorized funds allocated for the project, composed of the cost baseline plus management reserves.
Funding Requirements
Funding requirements define the total and periodic funding needs derived from the cost baseline, including projected expenditures plus anticipated liabilities.
Control Costs
Control Costs is the process of monitoring the status of the project to update project costs and managing changes to the cost baseline.
Earned Value Management (EVM)
Earned Value Management (EVM) is a methodology that integrates scope, schedule, and cost data to assess project performance and progress objectively.
Planned Value (PV)
Planned Value (PV) is the authorized budget assigned to scheduled work, representing the value of work planned to be completed by a given point in time.
Earned Value (EV)
Earned Value (EV) is the measure of work performed expressed in terms of the budget authorized for that work.
Actual Cost (AC)
Actual Cost (AC) is the realized cost incurred for the work performed on an activity during a specific time period.
Schedule Variance (SV)
Schedule Variance (SV) is an EVM metric that measures schedule performance as the difference between earned value and planned value: SV = EV - PV.
Cost Variance (CV)
Cost Variance (CV) is an EVM metric that measures cost performance as the difference between earned value and actual cost: CV = EV - AC.
Schedule Performance Index (SPI)
Schedule Performance Index (SPI) is an EVM efficiency metric that measures schedule performance as the ratio of earned value to planned value: SPI = EV / PV.
Cost Performance Index (CPI)
Cost Performance Index (CPI) is an EVM efficiency metric that measures cost performance as the ratio of earned value to actual cost: CPI = EV / AC.
Estimate at Completion (EAC)
Estimate at Completion (EAC) is the expected total cost of completing all work, calculated by projecting current performance into the future.
Estimate to Complete (ETC)
Estimate to Complete (ETC) is the expected cost needed to finish all remaining project work from the current point in time.
Variance at Completion (VAC)
Variance at Completion (VAC) is the projected difference between the budget at completion and the estimate at completion: VAC = BAC - EAC.
To-Complete Performance Index (TCPI)
The To-Complete Performance Index (TCPI) is a measure of the cost performance that must be achieved on remaining work to meet a specified management goal, either the BAC or EAC.
S-Curve
An S-curve is a graphical display of cumulative costs, labor hours, or other quantities plotted against time, forming a characteristic S-shape.
Cost of Quality
Cost of Quality (COQ) is the total cost incurred to ensure quality, including both the cost of conformance (prevention and appraisal) and the cost of nonconformance (internal and external failure).
Life Cycle Costing
Life cycle costing considers the total cost of ownership over the entire life cycle of a product, from acquisition through operation, maintenance, and disposal.
Related Domains
Schedule Management
Planning and controlling the project timeline — critical path, dependencies, estimating, and compression.
Risk Management
Identifying, analyzing, and responding to project risks — risk register, response strategies, and monitoring.
Integration Management
Coordinating all project elements — charter, change control, lessons learned, and project closure.
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