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7 - PROJECT COST MANAGEMENT

Depending on the assumed distribution of values within the range of the three estimates the expected cost, cE,
can be calculated using a formula. Two commonly used formulas are triangular and beta distributions. The formulas
are:
• triangular distribution. cE = (cO + cM + cP) / 3

• Beta distribution (from a traditional PERT analysis). cE = (cO + 4cM + cP) / 6
Cost estimates based on three points with an assumed distribution provide an expected cost and clarify the
range of uncertainty around the expected cost.

7.2.2.6 reserve Analysis

Cost estimates may include contingency reserves (sometimes called contingency allowances) to account for
cost uncertainty. Contingency reserves are the budget within the cost baseline that is allocated for identified risks,
which are accepted and for which contingent or mitigating responses are developed. Contingency reserves are
often viewed as the part of the budget intended to address the “known-unknowns” that can affect a project. For
example, rework for some project deliverables could be anticipated, while the amount of this rework is unknown.
Contingency reserves may be estimated to account for this unknown amount of rework. Contingency reserves can
provide for a specific activity, for the whole project, or both. The contingency reserve may be a percentage of the
estimated cost, a fixed number, or may be developed by using quantitative analysis methods.

As more precise information about the project becomes available, the contingency reserve may be used,
reduced, or eliminated. Contingency should be clearly identified in cost documentation. Contingency reserves are
part of the cost baseline and the overall funding requirements for the project.

Estimates may also be produced for the amount of management reserve to be funded for the project.
Management reserves are an amount of the project budget withheld for management control purposes and are
reserved for unforeseen work that is within scope of the project. Management reserves are intended to address the
“unknown unknowns” that can affect a project. The management reserve is not included in the cost baseline but
is part of the overall project budget and funding requirements. When an amount of management reserves is used
to fund unforeseen work, the amount of management reserve used is added to the cost baseline, thus requiring an
approved change to the cost baseline.

7.2.2.7 cost of Quality (coQ)

Assumptions about costs of quality (Section 8.1.2.2) may be used to prepare the activity cost estimate.

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