💰 Cost Management & Earned Value
Study Notes — Page 4 | ClearPMPExam.com
1. What is Cost Management?
Cost Management involves planning, estimating, budgeting, and controlling project costs so that the project is completed within the approved budget.
Simply put — it is the process of making sure you don’t run out of money before the project is done, and that every rupee spent is delivering value. Cost Management is where the famous Earned Value Management (EVM) formulas live — and EVM is the single most tested topic in the entire PMP exam.
🏥 Real Example — Pharma Campaign
A pharma company approves ₹20 lakh for a digital campaign. Cost Management means: estimating how much each activity costs (videos, ads, web), adding reserves for risks, getting approval for the final budget, then tracking every week whether you’re spending in line with the work being done — not just whether money is left.
👉 A project can be “under budget” in terms of cash spent but still be in trouble if the work isn’t keeping pace. EVM tells you the real picture.
2. The 4-Step Cost Management Process — In Order
Plan Cost Management
Decide how costs will be estimated, structured, monitored, and controlled throughout the project. Sets the rules for everything that follows.
Output → Cost Management PlanEstimate Costs
Calculate the cost of each activity and resource. Uses Analogous, Parametric, Bottom-Up, or Three-Point estimation. Also estimates contingency reserves for identified risks.
Output → Cost Estimates, Basis of EstimatesDetermine Budget
Aggregate all estimated costs to establish the Cost Baseline — the approved time-phased budget used for performance measurement. Management Reserve is added on top to get Total Project Funding.
Output → Cost Baseline, Project Funding RequirementsControl Costs
Monitor actual spending against the baseline. Use Earned Value Management (EVM) to measure true project performance. Identify variances, forecast final cost, and manage changes.
Output → Work Performance Information, Cost Forecasts, Change Requests3. Reserves — Contingency vs Management
Before the budget is finalised, two types of extra money are set aside for risk. The exam consistently tests which reserve is for what, and who controls each one.
🔵 Contingency Reserve
For known risks — risks that have been identified and planned for in the Risk Register.
Example: You know there may be vendor delays. You add ₹1 lakh buffer for this known risk.
This reserve is inside the Cost Baseline.
Controlled by: Project Manager🔴 Management Reserve
For unknown risks — surprises that were not anticipated during planning.
Example: A sudden regulatory change requires unplanned rework. Management Reserve covers this.
This reserve is outside the Cost Baseline.
Controlled by: Senior ManagementHow the Budget Stacks Up
📌 Cost Baseline = All activity costs + Contingency Reserve (excludes Management Reserve)
📌 Total Project Funding = Cost Baseline + Management Reserve
Cost Baseline does NOT include Management Reserve. EVM performance (PV, EV, AC) is always measured against the Cost Baseline, not Total Project Funding.
Contingency = PM’s safety net (known risks). Management Reserve = Management’s emergency fund (unknown shocks). PM can dip into Contingency. Only management unlocks the Management Reserve.
4. Earned Value Management — The 4 Core Terms
Earned Value Management is a method for measuring true project performance by comparing the value of work planned vs work completed vs money actually spent — all at the same point in time.
The genius of EVM is that it answers a question that a simple budget report cannot: “Yes, we’ve spent ₹30,000 — but are we getting ₹30,000 worth of work done?” EVM tells you whether you are ahead, behind, over budget, or under budget — all in one set of numbers.
Planned Value
The budgeted value of work you planned to complete by this point in time.
PV = % planned work × BAC
Earned Value
The budgeted value of work you actually completed — regardless of what it cost.
EV = % work done × BAC
Actual Cost
The actual money spent so far to complete the work done.
Always given in the question
Budget at Completion
The total approved budget for the entire project — the original plan.
Always given in the question
In every EVM question, calculate EV first. EV sits in the middle — it’s used in both CPI (EV ÷ AC) and SPI (EV ÷ PV). If you get EV wrong, every other number is wrong. EV = % work done × BAC.
5. All 8 EVM Formulas — The Complete Set
These 8 formulas cover every EVM question in the exam. Learn the formula, the interpretation, and the trigger word for each one.
| Formula | Calculation | What it tells you | Key rule |
|---|---|---|---|
| CV — Cost Variance | EV − AC | Positive = under budget ✅ Negative = over budget ❌ |
Negative CV = spending more than work delivered |
| SV — Schedule Variance | EV − PV | Positive = ahead of schedule ✅ Negative = behind schedule ❌ |
Negative SV = less work done than planned |
| CPI — Cost Performance Index | EV ÷ AC | >1 = under budget (efficient) ✅ = 1 = on budget <1 = over budget ❌ |
CPI 0.85 = for every ₹1 spent, only ₹0.85 value delivered |
| SPI — Schedule Performance Index | EV ÷ PV | >1 = ahead of schedule ✅ = 1 = on schedule <1 = behind schedule ❌ |
SPI 0.8 = only 80% of planned work is done |
| EAC — Estimate at Completion | BAC ÷ CPI | Expected FINAL cost of the project if current efficiency continues | Most common EAC formula in exam |
| ETC — Estimate to Complete | EAC − AC | How much money is still needed to finish the project | Remaining cost from today to completion |
| VAC — Variance at Completion | BAC − EAC | Positive = will finish under budget ✅ Negative = will finish over budget ❌ |
Positive VAC = profit. Negative VAC = loss. |
| TCPI — To Complete Performance Index | (BAC − EV) ÷ (BAC − AC) | Efficiency needed in remaining work to finish within original budget | TCPI > 1 = must work more efficiently than before |
6. How to Read CPI and SPI — Traffic Light Guide
When the exam gives you a CPI or SPI number, you need to instantly know what it means. Use this traffic light interpretation.
CPI — Cost Performance Index (EV ÷ AC)
SPI — Schedule Performance Index (EV ÷ PV)
For both CPI and SPI: >1 = good news. <1 = bad news. = 1 = perfect. Simple as that. The same rule works for both indices.
7. Full Worked Example — Step by Step
The exam always gives you a scenario with numbers. Here is how to solve any EVM question, using the exact method from your notes.
🧮 Example — Pharma App Project
Given: BAC = ₹80,000 | Total Duration = 8 months | Time Elapsed = 4 months
Given: Work Completed = 40% | Actual Cost (AC) = ₹30,000
Key insight from this example: The project is spending money efficiently (good CPI) but the team is completing less work than planned (bad SPI). This means they are working slowly but not wastefully. The PM needs to accelerate pace — not cut costs.
8. How to Calculate EV and PV When Not Directly Given
Sometimes the exam doesn’t give you EV or PV directly. You have to calculate them from the information provided. There are two common scenarios.
| Scenario | What’s given | Formula to use | Example |
|---|---|---|---|
| % work completed is given | BAC + % complete | EV = % complete × BAC | 40% done, BAC ₹80,000 → EV = ₹32,000 |
| % planned not given, but time is given | BAC + time elapsed + total duration | % planned = time elapsed ÷ total duration PV = % planned × BAC |
4 months of 8 done → 50% planned → PV = ₹40,000 |
| AC is always just given | AC stated directly | No calculation needed | AC = ₹30,000 (just use it) |
| BAC is always just given | BAC stated directly | No calculation needed | BAC = ₹80,000 (just use it) |
Step 1: Find or calculate EV first. Step 2: Find or calculate PV. Step 3: Note the AC and BAC given. Step 4: Plug into whichever formula the question is asking for. Never skip Step 1.
9. Quick Summary — Everything at a Glance
| Term / Formula | What it means | Exam trigger |
|---|---|---|
| BAC | Total approved project budget | “total budget” / “original budget” |
| PV | Budgeted value of planned work | “what we planned to have done” |
| EV | Budgeted value of completed work | “what we actually got done” |
| AC | Actual money spent | “what we actually spent” |
| CV = EV − AC | Cost variance — positive = under budget | “over / under budget by how much” |
| SV = EV − PV | Schedule variance — positive = ahead | “ahead / behind by how much” |
| CPI = EV ÷ AC | Cost efficiency — >1 good, <1 bad | “cost efficiency” / “for every rupee spent” |
| SPI = EV ÷ PV | Schedule efficiency — >1 good, <1 bad | “schedule efficiency” / “how far ahead / behind” |
| EAC = BAC ÷ CPI | Expected final project cost | “how much will the project cost in total” |
| ETC = EAC − AC | Cost still needed to finish | “how much more money is needed” |
| VAC = BAC − EAC | Final surplus or overrun | “will we finish over or under budget” |
| TCPI = (BAC−EV) ÷ (BAC−AC) | Efficiency needed in remaining work | “what CPI do we need going forward” |
| Contingency Reserve | For known risks — PM controls | “known risk” / “identified risk” |
| Management Reserve | For unknown surprises — management controls | “unknown risk” / “unexpected event” |
| Cost Baseline | Budget excluding Management Reserve | “approved budget for measurement” |
🎯 Practice Q&A — Test Yourself
Think of your answer first. Then click to reveal.
Step 2 — PV: 6÷10 = 60% planned. PV = 60% × ₹1,00,000 = ₹60,000
CPI = EV ÷ AC = ₹50,000 ÷ ₹45,000 = 1.11 → Under budget ✅
SPI = EV ÷ PV = ₹50,000 ÷ ₹60,000 = 0.83 → Behind schedule ❌
Management Reserve = extra money for unknown surprises — things nobody anticipated. Controlled by senior management. NOT included in the Cost Baseline — added on top to get Total Project Funding.
✅ Page 4 complete. Next up: Page 5 — Risk Management — Risk response strategies, Risk Register, probability & impact matrix, and Agile risk handling.