PMP Cost Management: Understanding Reserves

Have you ever done one of those 5K mud run obstacle courses? Me neither, but I imagine that it is just as you think you are through one obstacle and feeling exhausted, you encounter another. That’s how I felt studying project cost management, because every time I thought I understood a concept, I realized I didn’t. I kept running into a new obstacle.

pmp cost management reserves

Cost management won’t be an obstacle course for you after reading this article.

Do yourself a favor, and understand the Determine Budget outputs better than I did. Avoid making the Cost Management chapter of the PMP exam feel like you’re running a 5K with obstacles!

Key PMP Cost Management Definitions

The wordy definitions for cost management in the PMBOK guide really didn’t do it for me when I was studying for the PMP exam. Before reading this article, I recommend reading the Project Cost Management chapter in the PMBOK guide, beginning on page 193. Specifically, we’ll be talking about the outputs of the Determine Budget process, which are a little arcane. This description is found on pages 212 to 214 of the PMBOK Guide.

Once you have your brief understanding, read through this article to understand more about the outputs of the Determine Budget process. Figure 7-8 on page 213 is a good supplement to this article as well.

Without further ado, here are the main definitions you need to know:

  • Project Budget = Management Reserve + Cost Baseline
  • Cost Baseline = Control Accounts = Contingency Reserve + Work Package Cost Estimates
  • Work Package Cost Estimates = Activity Contingency Reserve + Activity Cost Estimates

What better way to understand than to put this information in context? Read on for an example.

PMP Cost Management In Context

You are using your project management skills for a party! If you are throwing a party, you’ll need cocktails, appetizers, and dinner. You develop Activity Cost Estimates for each of these items. But what if everything goes wrong?

But wait, one of your friends who is coming to the party is gluten free! So you need to adjust your costs to make sure there is an entrée and dessert that meets his needs. Your activity contingency reserve covers this risk that one of your guests might be gluten free. You thought that someone might tell you at the last minute that they had dietary restrictions, so you planned for this risk.

Now your party has begun, and everything is going great. After dinner, you realize you’ve made a horrible mistake! You didn’t think folks would want dessert, but everyone is still hungry. So you run out to grab some brownies from the grocery store and spend from your contingency reserve.

The next morning, you realize that an unforeseen risk has occurred. Your friends partied a little too hard, and you can’t get the food and drink stains out of your carpet and couch. You didn’t plan for this unforeseen risk, so now you need to use your management reserves to cover the cost of a cleaning service or a new couch!

So let’s take our definitions and put them into the context of your party.

  • Work Package Cost Estimates = Activity Cost Estimates + Activity Contingency Reserve = Cost of Entrees + Costs that Folks Have Dietary Restrictions
  • Cost Baseline = Control Accounts = Work Package Cost Estimates + Contingency Reserve = Total Cost of Food & Drinks + Cost of Forgetting Dessert
  • Project Budget = Cost Baseline + Management Reserve = Cost of the Party + Cost of Unknown unknowns, such as replacing your couch

I apologize that your party went so awry, but the good news is that it helped you learn the key parts of the Determine Budget outputs! It’s a silly example, but can you see how it relates to a larger project. Once you are able to draw that larger connection, then you are really getting somewhere with this chapter.

Next Steps for Studying Cost Management

I found this particular portion to be one of the toughest parts of studying for the PMP exam, because the even though we are in the cost management section, there were not a lot of formulas. Here are a few tips to make these concepts stick.

  • Consider adding these formulas to your PMP Brain Dump. – I didn’t, and I regret it. Add these formulas to your brain dump so that you study them regularly.
  • Write an example to bolster your knowledge. – The story I shared above about party planning is the actual one I used to study these concepts for the PMP exam. I also would write or outline how the concepts in project cost management related to previous projects I had worked on. In many cases, I was familiar with the concept but not the particular terminology used in the PMBOK guide.
  • Use several different resources. Even referring to another Magoosh blogger’s post might be helpful. They may explain the concept in a different way that works better for you. Also, you know your brain and you should study the resources and articles that make this chapter resonate for you.

Project cost management can be a familiar chapter for some, but for me, it wasn’t. I found that contextualizing everything and coming up with examples was a great strategy for me to do really well in this area on my PMP exam.

Are you ready for the Determine Budget process? If you’ve got more questions, share ‘em below!

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  • Rich Rinaldi

    Rich writes about Excel and the PMP for Magoosh. He's an Excel nerd who passed his PMP exam with 4 Proficients & 1 Moderately Proficient (curse that Initiation domain!). He earned his BSBA in Operations Management at Georgetown University and his MBA in Non-Profit Management at Chaminade University in Honolulu. He works as a business analyst & project manager at a nationwide non-profit headquartered in Villanova, PA. Rich and his fiancée Hadley enjoy traveling the world or playing with Bear, Cherokee, and Nalani (their cats).

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