HKSM

A cost management plan explains how project costs will be estimated, budgeted, funded, monitored, and controlled. It defines methods, roles, thresholds, and reporting needed to manage cost performance and changes.

Key Points

• Describes how to estimate, budget, fund, govern, and control project costs across the lifecycle.
• Forms a component of the project management plan and aligns with organizational financial policies.
• Specifies estimation techniques, accuracy ranges, rounding rules, and measurement units.
• Defines cost aggregation, the cost baseline, funding releases, and handling of contingency and management reserves.
• Sets control thresholds, variance responses, performance metrics (such as EVM), and reporting cadence.
• Establishes cost-related change control and integration with scope and schedule baselines.

Purpose

• Provide a consistent approach to estimating, budgeting, and controlling costs.
• Enable transparent cost decisions aligned with business rules and governance.
• Clarify roles, approvals, and thresholds for managing cost variances and changes.
• Support performance analysis and forecasts using agreed metrics and reporting formats.

Typical Sections

• Cost governance: roles, responsibilities, and approval authorities.
• Estimation approach: techniques, data sources, assumptions, accuracy, and rounding.
• Units of measure and currency rules, including exchange rate handling.
• Cost aggregation and budgeting method, including the cost baseline and phased funding.
• Reserves strategy: contingency and management reserve definitions and access.
• Control thresholds, variance response rules, and cost change control process.
• Performance measurement and reporting: metrics (e.g., CPI, SPI), rules of credit, and report cadence.
• Integration with schedule, scope, procurement, and risk management processes.

How to Create

• Review organizational policies, financial controls, and historical cost data to set compliance boundaries.
• Select estimation techniques (analogous, parametric, three-point, bottom-up) and define accuracy and rounding rules.
• Specify measurement units, currencies, and how exchange rates will be sourced and updated.
• Describe cost aggregation, budgeting timing, and how the cost baseline will be built and maintained.
• Define contingency and management reserves, ownership, release conditions, and tracking.
• Set control thresholds, variance response plans, and the cost change control workflow.
• Choose performance metrics and reporting formats, including any EVM rules of credit and forecast methods.
• Obtain stakeholder review and approval to align with governance and funding expectations.

How to Use

• Apply defined estimation methods and accuracy rules when preparing cost estimates.
• Establish and communicate the cost baseline and phased funding profile to stakeholders.
• Monitor actual costs and commitments, compare to the baseline, and act on threshold breaches.
• Report performance using agreed metrics and cadence, including EVM where applicable.
• Process cost-related changes through the defined change control workflow.
• Coordinate with schedule, scope, risk, and procurement management to keep baselines aligned.

Maintenance Cadence

• Review at each major planning cycle, phase gate, or when funding strategy changes.
• Update when estimation methods, accuracy, currency rules, or reporting needs change.
• Revise control thresholds or variance responses after significant performance trends or lessons learned.
• Synchronize updates with baseline re-planning and approved change requests.

Example

Excerpt from a cost management plan for a mid-size project:

• Estimation: Use bottom-up for work packages, parametric for repetitive tasks; accuracy -10% to +15%; round to nearest 1,000.
• Units and currency: USD; exchange rates from corporate treasury, refreshed monthly.
• Budgeting: Costs aggregated by control accounts; cost baseline approved at Gate 2; quarterly funding releases.
• Reserves: 10% contingency held in control accounts; management reserve held by sponsor, released via change control.
• Control thresholds: ±5% variance at control account triggers analysis and corrective action; ≥10% requires change request.
• Performance: EVM with monthly status; rules of credit defined per work package; reports include CPI, SPI, EAC, and variance narratives.

PMP Example Question

You are setting tolerance bands for cost variance and defining how to calculate CPI and EAC. Which document should you update?

1. Project charter
2. Scope management plan
3. Cost management plan
4. Cost baseline

Correct Answer: C — Cost management plan

Explanation: The cost management plan defines cost metrics, thresholds, and control processes. The cost baseline is the approved budget, not the place to define methods and thresholds.