Hello readers and welcome back to our project management career series, which is focused on helping you prepare for a change of job or an interview either as a project manager or as a project team member.
In our project management career series, we already explored the following areas:
- Introduction of Concepts
- Scope Management
- Time Management
- Quality Management
In this article, we will be exploring project management interview questions that could arise from the project cost management knowledge area. As usual, this article will also be providing practical ways to answer these questions.
Project Cost Management
Continuous research both in academics and practice has identified cost overrun as one of the major causes of project failure in organizations. If we can remember, cost is one of the three project constraints; hence it is necessary for any reasonable employer to test how knowledgeable a prospective employee is in handling project cost.
According to the PMBOK, project cost management is the “processes involved in planning, estimating, budgeting, financing, funding, managing, and controlling costs so that the project can be completed within the approved budget.” However, these processes do vary across organization, hence the organization type and structure should always be considered when managing cost. The organizational process asset is therefore relevant in determining how cost is managed.
The following are prospective project cost management related questions you can expect during a project management interview.
Q. You are the project manager for a software development organization and are estimating the initial cost of the project. Sometime last year, you handled a similar project of similar magnitude. What is the fastest method that you should use to determine the initial estimated cost?
Answer – There are four main methods of estimating: analogous estimating, parametric estimating, bottom-up estimating, and three-point estimating. Bottom-up estimating and three-point estimating are detailed methods of estimation, which consumes time and requires detailed information for calculating. This wouldn’t be appropriate since we hope to get the estimate in the shortest possible time.
Parametric estimate uses statistical estimates between relevant historical data (which we have) and other variables (which might not be readily available). Since the question states an initial estimate and makes reference to a previous similar project, an analogous estimate would be the fastest method to determine a broad estimate. We can assume that since it is the first estimate, little information is known about the project. We should however remember to mention that this is the least accurate method and detailed estimation should be carried out later to determine the detailed project cost.
Q. After a series of analysis, you realized that your project is ahead of schedule but under cost. What does that tell you about the project?
Answer – First, the analysis carried out is the earned value analysis. Being over schedule and under cost simply means you have completed more work than you should have below the planned cost for that project phase. Yes, that’s great news, but you should also begin to look and analyze the risk using the risk indicators in order to determine if there was an oversight.
Q. Differentiate between contingency reserve and management reserve.
Answer – You can as well expect this question in your interview. These are two terminologies often mixed up by some project managers.
- Contingency reserve – This is a planned amount of money (or time) added to the project cost (or time) estimate to serve as a “project risk” buffer. Contingencies are responses to specific risks which has been pre-identified by the project.
- Management reserve – This is a planned amount of money (or time) set aside to address unforeseen risks in a project. The management reserve is not within the usual budget of the project manager and the project manager would need the permission of the senior management, and sometimes the sponsor, to access it.
Q. What does the schedule and cost performance indexes tell you about the status of your project?
- Scheduled performance index (SPI) – This is a measure of schedule efficiency expressed as the ratio of earned value to planned value. An SPI of 1.0 means that the work actually done so far is exactly the same as the work planned to be done so far. When it is greater than 1.0, project is ahead of schedule meaning more work than planned has been completed and when less than 1.0, it is behind schedule.
- Cost performance index (CPI) – This is a measure of the cost efficiency of budgeted resources expressed as the ratio of earned value to actual cost. A CPI of 1.0 means the project is exactly on budget, that the work actually done so far is exactly the same as the cost so far. When CPI is greater than 1.0, it is under the planned cost and when it is less than 1.0, it is over the planned cost.
Q. Name and explain three project management techniques you would use when controlling project cost.
Answer – There are six tools and techniques used in controlling the project cost; feel free to mention and explain any three.
Earned value management – This is the use of scope, schedule and resource measurement to determine the state and performance of the project.
Forecasting – This is done by making estimates about the future performance of a project based on the current performance of the project.
To Complete Performance Index (TCPI) – This is a measure of the cost performance required to be achieved with the remaining resources in order to meet a specified management goal, expressed as the ratio of the cost to finish the outstanding work to the remaining budget.
Performance review – This is the use of variance analysis, trend analysis and earned value analysis to determine the cost and schedule performance over time and the estimated funds required to complete work in progress.
Project management software – This is often used to graphically monitor the earned value management as well as forecasting a range of possible final outcomes of the project.
Reserve analysis – This is used in monitoring the status of management and contingency reserves so that the project does not suddenly run out of budget.
Q. While a project is ongoing, you realize that an error in your cost estimate of one of the primary resources needed to complete was unaccounted for. What would you do?
Answer – Once an error is noticed, you should quantify the impact on the project and report it to the senior management. This error would definitely affect the cost baseline. While we should always try to avoid mistakes, they do occur and it is our professional responsibility to report them to the management especially when it has a financial implication to the project.
Q. You are in the planning stage of a project, your project sponsor has told you the maximum amount he is willing to spend on the project. However, from your cost analysis, the amount cannot complete the scope requirement. How do you handle this situation?
Answer – This is a technical question and you need to revisit the triple constraints. Cost has been identified as a primary constraint. The question did not identify time as a major constraint, so we can therefore assume time is not a major constraint to the sponsor. Since cost is a fixed constraint and our cost estimates show that the budget is insufficient to conclude the requirement, then you have to advice the management/sponsor on cutting down the project scope. You can identify an extra requirement that doesn’t affect the core function of the product to be eliminated.
We should always remember that while it is our duty to satisfy the stakeholders, it is also our duty to ensure the project objectives are met within the project constraints.
Q. What is the most important document when planning cost?
Answer – The most important document when planning project cost is the project management plan. The project management plan is the most important document for any project and it contains all the other management plans such as the project time management plan, project scope management plan, project quality management plan, etc. All the information required to plan cost is available in the project management plan.
Q. Explain the project cost baseline.
Answer – The cost baseline is the information that deals with the amount of money the project is estimated to cost and what time during the project the money would be spent. The cost baseline is the estimate cost of the project plus the contingency reserve. The cost baseline is however constantly reviewed, as it is possible to have several intermediate baselines based on changes that occur during a project.
Today, we have identified a list of probable interview questions that you could face regarding cost management when you attend a project management interview. As usual, we would like to highlight that these questions have been framed in a generic form so that it can be adapted to whatever industry you work in. Expect to see industry-related, case-related and abstract questions during an interview. The idea is to analyze and understand the questions before answering.
Also, preparing for interviews is serious business and we should always handle it as such. Never go for an interview unprepared. Sometimes while preparing, we often neglect little details such as researching on the organization we applied to, what industry they belong to and what characteristics they look for in their employees. Being technically sound is definitely important but passing an interview is more than just acing its technical aspect.
Once again, thank you for reading and do not forget to share and drop a comment below.