PMP Question Series: Cost Management

(1) The customer responsible for overseeing your project asks you to provide a written cost estimate that is 30% higher than your estimate of the project's cost. He explained that the budgeting process requires managers to estimate pessimistically to ensure enough money is allocated for projects. What is the best way to handle it

a) add the 30% as a lump sum conginency fund to handle project risks
b) ask for information on risks that would cause your estimate to be too low (x)
NOTE: presenting anything besides your original estimate calls into question your competence and integrity as a PM.

(2) Your project is not very well defined. The sponsor hands you a project charter and ask you to confirm that the project can be completed within the project cost budget. What is the best method to handle this?

a) build estimate in the form of a range of possible results (x)
b) provide an analogous estimate based on past history

(3) Your cost forecast shows you will have a cost overrun at the end of the project. which of the following should you do?

a) eliminate risks in estimates (x)
b) meet with the sponsor to find out what work can be done sooner

(4) monitoring cost expended to date in order to detect variances from the plan occurs during:

a) product performance reviews (x)
b) updating cost baseline
c) creating cost change management plan

(5) A COST MANAGEMENT PLAN CONtains a description of

a) the project cost
b) the wbs level at which earned value wil be calculated (x)

(6) Earned value analysis is an example of

a) performance reporting

(7) The difference between the cost baseline and the cost budget can be described as:

a) The management reserve

(8) You provide a project cost estimate for the project to the project sponsor. He is unhappy with the estimate because he thinks the price should be lower. He asks you to cut 15% off the estimate. what should you do?

a) Inform the sponsor of the activities to be cut (x)
b) Add additional resources with low hourly rate

(9) Which estimating method tends to be most costly for creating a project cost estimate?
(a) analogous (b) parametric (c) bottom0up (x)

(10) A PM needs to analyze the project costs to find ways to decrease costs. It would be best if the PM looks at:
-> direct cost and variable cost

(11) Your project is being completed in another country where a local official informs you he will stops the project work unless you pay him US $50. What is the best thing to do?

-> This is a bribe, do not make the payment

(12) You are working on a new oil purification project in a foreign country. A person informs you that you will have to pay him a "transfer fee" for the permit to move heavy equipment through the city. What is the first thing you should do?

-> make sure the person is really a government official. Only government officials can collect routine government fees.

(13) while reviewing project performance, the PM determines that the schedule variance is -500. What is the next thing to do?

a) determine the cost variance
b) look for activities that can be done in parallel (x)

(14) The cost of material is most likely $100,000, optimistically $90,000, and pessimistically $120,000. What is the probability that the project will cost under $100,000?

-> (90000 + 120000 + 4* 100000) / 6 = 610000/6 > 100,000
so the probability that the project is less than 100,000 is less than 50%

(15) which of the following is the least effective way to influence the factors that create changes to the cost baseline?

a) explain to those requesting changes the negative impact of change to the project
b) notify all stakeholders that no more changes will be allowed (x)

(16) funding limit reconciliation:
--> it describes the checking of costs against the budget set for the project. funding may not be available when needed, causing changes to other parts of the project.

(17) all the following are relevant for analyzing a cost overrun except:
a) lag
b) communication management plan(x)

(18) all the following are tools of the determine budge process except:
a) aggregation
b) bottom-up estimate (x)

(19) what is 50/50 rule?
-> an activity is considered 50% complete when it begins and get credit for the last 50% when it is completed.

(20) A project team budgeted $3000 for the work performed and has spent $4000 to date. If they budgeted $5000 for the work scheduled, what is the cost variance? what is the schedule variance?

CV = 3000 -4000 = -1000
SV = 3000 - 5000 = -2000

(21) The best method to control costs is to:
a) estimate during planning and then re-estimate before each activity begins
b) estimate at the beginning of the project and check cost against cost baseline (x)

NOTE: this is a tricky question. Cost is estimated in both initiation process and planning process even though the cost estimate will not to be accurate (order of magnitude). choice (b) smells since you do not re-estimate before each activity begin, that is unnecessary work

(22) the best way to decrease the cost of a project is decreasing:
-> variable and direct

(23) Funding limit reconciliation
This is one of the tools used in determining budget process. The expenditure of funds needs to be reconciled with funding limits, and the limits / planned expenditures could necessitate the rescheduling of work to level out the rate of expenditure. For example, placing imposed date constraints for work in project schedule.

So the funding limit reconciliation should be done after schedule compression

(24) A seller submits an invoice that is outside of the funding limit reconciliation during project planning. What is the least likely cause?
a) The was a cost increase to the successor activity of a critical path activity
b) equipment was received earlier than planned
c) The critical path was fast tracked during project planning (x)

--> funding limit reconciliation could result in a schedule compression (fast tracking/crashing) during planning, and the schedule compression during planning process should be in line with the funding limit reconciliation

(25) A parking lot project was bid at $11 per foot, and one company is doing all the work. There are 4 equal sides of 125 feet and requires the installation of a culvert on one side. Fencing should be installed at a rate of 100 feet per day. The culvert installation should happen before installation of fence. It will cost $500 and take one day to complete. After three days of work, one side is complete, another has 75 feet installed, and the culvert is completely installed. What is the status of the project in terms of budget/cost management?

-> schedule plan: one day for culvert, and 125x4/100 = 5 days of fence installation
-> cost plan: first day of installation of culvert, for the rest of 5 days: cost at: 125 x 4 x 11/5 = $1100/per day
After three day: the planned cost: $500 + $1100 + $1100

-> actual cost: culvert installation is complete $500, fence installation: (125 + 75)x11 = 2200

-> meet the budge and schedule !!

(26) During project execution, a new project manager is assigned to the project and finds that the activity cost estimates for the project have rarely been accurate. Which of the following was most probably not done?

a) obtain a cost constraint from management, perform a risk management, and form a team
b) form a team, create a WBS, and use historical records from previous project (x)

NOTE: b) is the correct process of estimate activity cost

(27) what would be the best explanation for the following: both cost variance and schedule variance are negative, but cost variance is lower than the schedule variance

a) the project overspent due to increased costs and yet completed some activities faster
b) the project underspent because all work was not completed, but overspent for work that was done (x)

NOTE: this is a tricky question. however, you need to understand that CV and SV are negative so that (a) is not correct.

The following is an example:
Actual cost : 400
Planned value: 500
Earned value: 300
Basically, there are some scheduled work not done: 300-500 = -200, and there is a cost overrun 300 - 400 = -(100) and actual cost is lower than planned value 400 - 500 = -100 (project underspent). A project underspent does not imply a positive CV and SV !!!
A project overspent means either a negative CV or SV or both
A project underspent is not always a good thing, and can also mean a negative CV and SV or both.

(28) Your project has a AC=$800million, PV=$890Millions, and a CPI=1.1. How is the project going?
a) The schedule is behind by 10 days
b) you have no real concerns about either schedule or budget (x)
NOTE: SPI = 1.1x800/890 = 0.99 CPI=1.1. Your project is slightly under schedule, however, that is not considered as seriously under schedule. (a) is definitely not correct since the SV=-10 millions. The correct way to say it is the project is behind schedule by 10 millions of work

(29) what does estimate at completion (EAC) mean?
a) Estimate average cost at project completion
b) Anticipated expense at project completion
c) Anticipated total cost at project completion (x)

(30) Analogous estimate use expert judgement and historical information to predict the future

(31) Your project spent $1,200.000, SPI=1.1. Considering you feel you should have spent $1,300.000 at this point. What is the CPI, SV, and CV?

AC=1,200.000
PV=1,300.000
SPI=1.1
-> EV = 1,300.000 x 1.1 = 1,430.000
-> CPI=1,430000/1,200.000 = 1.19

(32) Three precision levels of estimate:
rough order of magnitude: +/- 50%
budget estimate: -10% to 25%
definitive estimate: -5% to 10% (the most expensive method)

(33) CPI is 0.6 and SPI is 0.74. The project has 625 work packages and is being completed over a four-year period. The team members are very in experienced and project received little support for proper planning. Which of the following is the best thing to do?
a) reorganize the responsibility matrix
b) update the risk identification and analysis (x)

(34) You take over a project that is in a lot of trouble. CPI is 0.75 and SPI is 1.2. There are problems with the team dynamics, project scope, sponsor, and timeline. What is the first thing to do?
a) meet with the team
b) review all the project deliverables (x)