4.6. Plan and Manage Finance
💡 First Principle: Financial management on a project is forward-looking risk management, not backward-looking bookkeeping — the enablers here are almost entirely about anticipating variance and reserving for it, not just tracking spend after the fact.
Enablers: analyze project financial needs, quantify risk and contingency financial allocations, plan spend tracking throughout the life cycle, plan financial reporting, anticipate future finance challenges, monitor financial variations and work with the governance process, and manage financial reserves.
The distinction between contingency reserves (for known, identified risks) and management reserves (for unknown, unidentified risks) is a frequently tested nuance: contingency reserves are typically within the project manager's authority to use as identified risks materialize, while management reserves usually require sponsor/governance approval to release.
Building the budget
Start from the activity cost estimates, add contingency reserve for the identified risks, and you have the cost baseline — the approved, time-phased budget, changeable only through formal change control and used as the yardstick for actual results. Add management reserve for unforeseen in-scope work and you have the total project budget.
| Contingency reserve | Management reserve | |
|---|---|---|
| Covers | Identified risks — known unknowns, such as a specific vendor-delay risk | Unforeseen work within scope — unknown unknowns |
| Part of the cost baseline? | Yes | No |
| Released by | The project manager | The sponsor or governance body |
Quality spend belongs in the budget too. When a quality manager asks you to fund appraisal costs, that means money for verifying deliverables against specifications — a tester or inspection — not training (prevention) and not a rework allowance (failure). Prevention plus appraisal together make up the cost of conformance. See 4.7 for the full cost of quality model.
Earned value management
Earned value management (EVM) compares three measures at a point in time:
- Planned value (PV) — the authorized budget assigned to the work scheduled by now.
- Earned value (EV) — the budget for the work actually performed.
- Actual cost (AC) — what that performed work actually cost.
- Budget at completion (BAC) — the sum of all budgets for the work.
| Measure | Formula | Reading it |
|---|---|---|
| Cost variance | CV = EV − AC | Negative means over budget |
| Schedule variance | SV = EV − PV | Negative means behind schedule |
| Cost performance index | CPI = EV / AC | Below 1 — earning less than a dollar of value per dollar spent |
| Schedule performance index | SPI = EV / PV | Below 1 — less work done than planned by now |
EV appears in every formula; that is the anchor to remember. SPI 0.8 with CPI 0.9 means behind schedule and over budget. CPI 1.1 with SPI 0.8 means under budget but behind — and the usual cause is not efficiency but work simply not happening, because resources are unavailable or activities have not started, so less is spent because less is done.
⚠️ Exam Trap: A CPI above 1 is not automatically good news. Read it alongside SPI — under budget and behind schedule often signals stalled work rather than savings.
Forecasting the finish
Estimate at completion (EAC) forecasts the likely final total cost; estimate to complete (ETC) is the cost of the remaining work, and variance at completion (VAC) = BAC − EAC. Which EAC formula you use depends on what you believe about future performance:
| Assumption | EAC formula |
|---|---|
| Current cost performance will continue | EAC = BAC / CPI |
| Past variance was a one-off; remaining work runs at the budgeted rate | EAC = AC + (BAC − EV) |
| Both cost and schedule performance will drive the rest | EAC = AC + (BAC − EV) / (CPI × SPI) |
| The original estimates were fundamentally flawed | EAC = AC + a new bottom-up ETC |
⚠️ Exam Trap: The scenario's wording picks the formula. "The team believes future work will go as planned" is AC + (BAC − EV), even when CPI is currently below 1; "trends will continue" is BAC / CPI.
The to-complete performance index (TCPI) answers the sponsor's question "how efficient must we be from here to finish on budget?":
TCPI = (BAC − EV) / (BAC − AC)
A TCPI well above 1 means the target demands far better performance than the project has shown — often a signal that the budget target is unrealistic. If VAC is heavily negative, CPI is not expected to improve, and the sponsor will not add money, the remaining lever is scope: cut lower-value work while protecting the most valuable deliverables.
Corrective action and governance
Variances go to governance with a recommendation, not just a number. Match the fix to the work. For well-defined remaining work, predictive optimization applies — fast tracking or reallocating resources to the critical path. When there is no budget to crash, fast track the activities joined by discretionary dependencies (preferred or best-practice logic the team chose), because mandatory, external, and regulatory sequences cannot be overlapped safely. For requirements still being refined, adaptive techniques stop scope churn from creating further overruns.
Hybrid finance works the same way. An agile team can still give executives monthly EAC and ETC forecasts derived from velocity trends, combining adaptive delivery with predictive financial reporting.
Anticipating finance challenges also means spotting spend that will recur. Declining quality with steady velocity, for example, signals accumulating technical debt; on a limited budget, targeted automated testing, a fixed share of each sprint for debt reduction, and root cause analysis of escaped defects cost less than hiring more manual testers.
⚠️ Exam Trap: Using contingency and management reserves interchangeably in a scenario answer. The exam tests whether you know which reserve responds to a known risk that materialized versus an entirely unforeseen event.
