HKSM

A planning process that defines how the team will estimate, budget, fund, monitor, and control project costs throughout the life cycle.

Purpose & When to Use

The goal is to set clear rules for handling money on the project. This plan explains how costs will be estimated, how the budget will be built and time-phased, how funding will be requested, and how variances will be monitored and controlled. Create this early in planning and refine it as scope, schedule, and risks become clearer. Use it on all projects; tailor depth based on size, complexity, and contract type. In adaptive or hybrid efforts, include guidance for incremental funding, rolling-wave estimates, and frequent reforecasting.

Mini Flow (How It’s Done)

• Review context: business case, charter, scope baseline, schedule, staffing approach, procurement strategy, and key risks.
• Select estimating approaches: analogous, parametric, bottom-up, and three-point, and define when each will be used.
• Set units of measure, currencies, exchange rate handling, precision, and rounding rules.
• Define cost categories: direct versus indirect, fixed versus variable, recurring versus one-time, capital versus expense.
• Establish contingency policy: how to quantify, hold, release, and track contingency tied to identified risks.
• Clarify management reserve: who controls it, how it is accessed, and how approved use updates the baseline.
• Describe how the cost baseline will be built and time-phased, including integration with the schedule.
• Define control accounts, performance measurement rules, and Earned Value metrics and thresholds (if used).
• Set variance thresholds, reporting formats, forecast methods (EAC techniques), and escalation paths.
• Plan funding and cash flow: disbursement timing, funding limits, and reconciliation with the baseline.
• Address compliance: labor rates, overhead policies, taxes, inflation, learning curves, and audit requirements.
• Define roles and approvals: who estimates, who reviews, who approves budgets and changes.
• Integrate with change control: how cost impacts are analyzed and how baselines are updated after approval.
• Tailor for life cycle: frequency of estimate updates in iterative releases or rolling-wave planning.
• Outputs: a cost management plan component of the project management plan; updates to assumptions and risk registers.

Quality & Acceptance Checklist

• Estimating methods and data sources are stated and consistent with organizational policies.
• Units, currency, exchange rates, precision, and rounding rules are documented.
• Rules for contingency and management reserve are clearly distinguished and governed.
• Cost baseline creation and time-phasing approach are defined and linked to the schedule.
• Control accounts and performance measurement rules (including EVM, if applicable) are specified.
• Variance thresholds, reporting cadence, and forecast methods are set and practical.
• Indirect costs, overhead, taxes, fees, and procurement-related costs are addressed.
• Assumptions about inflation, price escalation, and market rates are recorded and testable.
• Roles, approvals, and change control steps for cost changes are unambiguous.
• Plan aligns with funding constraints and includes a method for funding limit reconciliation.

Common Mistakes & Exam Traps

• Confusing the cost management plan with the cost baseline; the plan is guidance, the baseline is the approved time-phased budget.
• Treating contingency and management reserve as the same; contingency is for known risks within the baseline, management reserve is outside the baseline and needs approval to use.
• Ignoring indirect costs or organizational rate policies, leading to underestimated budgets.
• Not defining units, currency, or exchange rate timing, causing inconsistent estimates in multinational projects.
• Skipping variance thresholds and forecast rules, which weakens cost control later.
• Over-specifying precision early; set realistic levels and refine with progressive elaboration.
• Assuming EVM is automatic; you must define control accounts, measurement methods, and reporting formats.
• For agile or hybrid work, failing to state how incremental funding, burn rates, and re-estimation will be handled.

PMP Example Question

The project will use Earned Value to monitor performance. During planning, what should the project manager define in the cost management plan to enable this?

1. Supplier payment milestones for all purchase orders.
2. Control accounts, measurement rules for earned value, and variance thresholds.
3. Only the total contingency amount to cover identified risks.
4. A list of cost overruns from past projects for reference.

Correct Answer: B — Control accounts, measurement rules for earned value, and variance thresholds.

Explanation: The plan should state how EVM will be applied, including control accounts, how to earn value, and acceptable variances. Supplier milestones and historical overruns may inform planning but do not define EVM rules.