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Learn how to estimate, budget, and control costs using earned value in Waterfall projects.
🎥 Watch PMP Exam Prep video series: https://www.youtube.com/playlist?list=PLaZjaTadwi1sDBAXtUd6JI5_FUsIJjpAT
How do project managers ensure predictive projects stay within budget while meeting scope and schedule goals? In this video, we’ll explore Waterfall Project Cost Management, focusing on cost estimating, budgeting, earned value analysis, forecasting, and financial decision-making.
This is the 5th video in our 15-part Waterfall Review & Question series. You’ll learn how to build a cost baseline, manage reserves, interpret earned value metrics, and apply forecasting techniques like EAC, ETC, and VAC. You’ll then test your understanding with 10 scenario-based practice questions (Questions 41–50) and detailed explanations.
✅ You’ll learn how to:
• Apply cost estimating techniques such as analogous, parametric, bottom-up, and three-point estimating
• Build and manage the cost baseline, contingency reserves, and management reserves
• Interpret earned value metrics including EV, AC, PV, CPI, and SPI
• Forecast project performance using EAC, ETC, and VAC formulas
• Align project spending with funding constraints using funding limit reconciliation
• Evaluate long-term cost decisions using Life Cycle Costing (LCC) and Total Cost of Ownership (TCO)
By practicing these questions, you’ll strengthen your ability to manage budgets, analyze cost performance, and communicate financial status — all critical skills for the PMP® exam and predictive project delivery.
Chapters:
0:00 Project Cost Management Overview
5:10 Question 41
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0:00
The topic we'll cover is cost
0:02
management. The process is used to plan,
0:04
estimate, budget, and control project
0:06
costs so the project is delivered within
0:09
its approved financial resources. In
0:12
waterfall projects, costs are planned in
0:14
detail upfront and tracked closely
0:16
against a cost baseline. The project
0:18
manager is responsible for ensuring that
0:20
all work stays within the approved
0:22
budget while still meeting scope and
0:24
quality requirements. Cost management
0:27
begins with estimating costs for each
0:30
activity or work package. The exam may
0:32
test you on several techniques.
0:34
Analogous estimating uses historical
0:36
data from similar projects and is fast
0:39
but less accurate. Parametric estimating
0:42
uses data-driven models such as cost per
0:44
square foot or cost per unit and is more
0:47
reliable when data is available.
0:49
Bottomup estimating aggregates detailed
0:52
estimates at the activity level to build
0:54
up the total cost which is the most
0:56
accurate but also the most
0:58
timeconsuming. Threepoint estimating
1:01
also known as per uses optimistic,
1:03
pessimistic and most likely values to
1:07
provide a rangebased estimate. Once
1:10
activity costs are estimated, they are
1:12
rolled up through cost aggregation into
1:14
the project's total estimated cost.
1:16
These values are then combined into the
1:18
cost baseline which includes contingency
1:20
reserves for known risks. When you add
1:23
management reserves for unknown risks
1:25
which are controlled by the sponsor, you
1:26
arrive at the total project budget.
1:29
During execution, cost performance is
1:31
monitored using earned value management
1:33
or EVM. You'll need to be comfortable
1:35
with the core variables. Planned value,
1:37
earned value, and actual cost. The exam
1:40
may also test you on key formulas. Cost
1:43
variance is EV minus AC. Schedule
1:46
variance is EV minus PV. The cost
1:49
performance index is EV divided by AC.
1:53
And the schedule performance index is EV
1:55
divided by PV. It is essential you
1:58
understand what the numbers mean. A
2:00
positive variance indicates favorable
2:02
performance while a negative variance
2:04
indicates a problem. For CPI and SPI,
2:07
values greater than one mean the project
2:10
is performing efficiently, while values
2:12
less than one signal cost overruns or
2:15
schedule delay. Beyond these, you'll
2:18
need to understand forecasts. Estimate
2:20
at completion or EAC has multiple
2:23
formulas depending on project
2:24
conditions. It can be BAC divided by CPI
2:27
when future performance is expected to
2:30
be similar to the past or AC plus ETC
2:34
when remaining work is estimated again.
2:36
EAC can also be AC plus BAC minus EV if
2:41
future work is expected to follow the
2:43
original plan. Finally, EAC can also be
2:47
equal to AC plus BAC minus EV divided by
2:50
CPI time SPI if both cost and schedule
2:54
performance are expected to impact the
2:56
remaining work. Estimate to complete or
2:59
ETC is equal to EAC minus AC which is
3:03
the expected cost to finish the
3:05
remaining work. Variance at completion
3:08
or VAC is the budget at completion minus
3:12
the estimate at completion. We went over
3:15
these EVM formulas very quickly in this
3:17
review. If you struggle to understand
3:19
these formulas, take a pause here or
3:21
check out our EVM simplified video next.
3:24
But most importantly, expect questions
3:26
that require interpreting these numbers
3:29
to determine whether a project is over
3:31
or under budget and whether it is ahead
3:34
or behind schedule. Another concept you
3:37
should know is funding limit
3:38
reconciliation, which ensures that
3:40
planned expenditures do not exceed the
3:42
organization's cash flow limits. If
3:45
spending spikes are forecasted, the
3:47
project manager may need to reschedu
3:49
work or adjust resources to smooth
3:51
expenditures. You'll also need to
3:53
understand reserves. Contingency
3:55
reserves are allocated for known risks
3:58
and are part of the cost baseline.
4:00
Management reserves are for unknown
4:02
risks sit outside the baseline and can
4:04
only be used with sponsor approval.
4:07
Finally, remember the broader financial
4:09
perspective tested on the exam. Life
4:12
cycle costing or LCC is about the big
4:15
picture cost used in the business case.
4:18
It includes the total cost of the
4:20
project or product over its entire life
4:22
from development through operations all
4:24
the way to retirement or disposal. Total
4:27
cost of ownership or TCO is about the
4:30
true cost of ownership in procurement
4:32
decision. It looks beyond the initial
4:34
purchase to include training,
4:35
maintenance, support, and long-term
4:38
upgrades. So, waterfall cost management
4:40
is about accurate estimation, building a
4:43
cost baseline, monitoring with EVM, and
4:46
controlling variances through formal
4:48
processes while also considering the
4:50
long-term financial picture with LCC and
4:53
TCO. Now, we'll go through practice
4:55
questions that test your knowledge of
4:57
estimating techniques, cost baselines,
5:00
earned value formulas, reserves, and how
5:02
life cycle costing and total cost of
5:04
ownership influence decision-making.
5:07
Let's get into the first question on
5:09
this topic. Question 41. A project
5:13
manager is launching a predictive
5:15
project in a highly costsensitive
5:17
government program. Senior leadership
5:19
emphasizes that cost performance will be
5:22
audited quarterly. During planning, the
5:24
team begins estimating activities, but
5:26
they realize there's confusion about
5:28
acceptable accuracy ranges and which
5:30
estimation techniques should be used for
5:33
different work packages. What should the
5:36
project manager do first? A meet with
5:38
the finance team to define the accuracy
5:41
thresholds and apply them across the
5:43
plan. B. Refer to the schedule
5:45
management plan to determine which cost
5:47
estimation methods are appropriate. C.
5:50
Develop or refine the cost management
5:52
plan to guide estimating and control
5:55
procedures.
5:56
D. Estimate using bottomup techniques to
5:59
ensure accuracy across the project. You
6:02
can pause the video here if you need
6:04
more time to work on the question. The
6:07
correct answer is C. This question tests
6:10
your understanding of cost management
6:12
planning in predictive environments,
6:14
especially when establishing rules for
6:16
how costs will be estimated, managed,
6:19
and reported. Choice C is the best
6:22
option because the cost management plan
6:24
defines the framework for cost
6:26
estimating, budgeting, and control. It
6:28
includes accuracy thresholds, cost
6:30
aggregation rules, and preferred
6:32
techniques. Ensuring consistency before
6:36
estimates begin. Choice A is incorrect.
6:39
While meeting with finance may help
6:41
align on thresholds, it's premature
6:43
without having the full cost management
6:45
plan in place. Finance provides input,
6:48
but the PM owns the plan. Choice B is
6:51
incorrect. The schedule management plan
6:53
is unrelated to cost estimating
6:55
techniques. Confusing these two planning
6:58
documents can lead to inconsistent
7:00
processes. Choice D is incorrect.
7:03
Bottom-up estimating is accurate, but
7:05
diving into estimation without a guiding
7:07
plan risks misalignment and inconsistent
7:10
assumptions across work packages. Let's
7:12
move on to the next question if you're
7:14
ready. Question 42. A project manager is
7:18
preparing preliminary cost estimates for
7:20
a predictive project. The WBS is still
7:23
under development, but senior leadership
7:25
has requested a forecast within 2 days
7:27
to secure initial funding approval. The
7:30
team has limited access to recent market
7:32
rates but possesses cost performance
7:34
data from past internal projects of
7:37
varying sizes. Which estimating approach
7:40
should the project manager use? A
7:43
parametric estimating B bottomup
7:45
estimating C analogous estimating. D
7:49
three-point estimating. You can pause
7:52
the video here if you need more time to
7:53
work on the question. The correct answer
7:56
is C. This question tests your ability
7:58
to choose the appropriate cost
8:00
estimation technique based on the level
8:02
of project definition, data
8:04
availability, and time constraints. All
8:06
critical considerations in predictive
8:08
planning. Choice C is the best option
8:11
because the project manager has limited
8:13
time and only highle data from past
8:15
internal projects. Analogous estimating
8:18
allows for quick estimates by leveraging
8:20
historical performance from similar
8:22
efforts even when the current WBS isn't
8:25
complete. Choice A is incorrect.
8:28
Parametric estimating typically requires
8:30
reliable market data or unit costs,
8:33
which the team lacks in this case.
8:35
Choice B is incorrect. Bottom-up
8:38
estimating is the most detailed and
8:39
accurate method, but it depends on a
8:41
completed WBS and takes more time than
8:44
the situation allows. Choice D is
8:46
incorrect. Three-point estimating
8:48
involves range-based uncertainty
8:50
modeling, but the scenario doesn't
8:52
suggest detailed risk data or sufficient
8:55
task level definition.
8:57
Let's move on to the next question if
8:58
you're ready. Question 43. A project
9:02
manager is finalizing the cost baseline
9:04
for a predictive infrastructure project.
9:06
The team has completed bottom-up
9:08
estimates for all activities and
9:09
included contingency reserves for known
9:11
risks. However, the sponsor reminds the
9:14
project manager that there are still
9:15
strategic risks that could impact scope
9:18
and cost even though they're unlikely.
9:21
What should the project manager do next?
9:24
A. Ask the steering committee for
9:26
additional contingency funding. B.
9:29
Include a management reserve. C.
9:32
Recalculate contingency reserves to
9:34
cover low probability risks. D. Exclude
9:38
the reserve to preserve baseline
9:39
integrity. You can pause the video here
9:42
if you need more time to work on the
9:44
question. The correct answer is B. This
9:47
question tests your understanding of how
9:49
to complete the cost baseline in
9:51
predictive projects by addressing both
9:53
known and unknown risks through proper
9:55
reserve planning. Choice B is the best
9:58
option because a management reserve is
10:00
designed to address unknown unknowns.
10:03
those unforeseen events or strategic
10:05
risks that aren't identified in the risk
10:08
register. Including it ensures the
10:10
project is better equipped to handle
10:12
future surprises without requiring
10:15
immediate approval. Choice A is
10:17
incorrect. While involving the steering
10:19
committee may eventually be necessary if
10:21
additional funding is needed at this
10:23
stage, the project manager should
10:24
include a management reserve as part of
10:26
proper budget planning, not defer
10:28
responsibility upward. Choice C is
10:31
incorrect. Contingency reserves are for
10:34
known unknowns which are identified
10:36
risks. Expanding them to cover strategic
10:38
or unknown risks misuses their intent.
10:41
Choice D is incorrect. Excluding
10:44
reserves undermines risk preparedness.
10:46
The project would be left vulnerable to
10:48
cost overruns if unexpected risks occur.
10:51
Let's move on to the next question if
10:52
you're ready. Question 44. A predictive
10:56
construction project is midway through
10:57
execution. The project manager notices
11:00
that while the earned value matches the
11:02
plan value, the actual cost is
11:04
significantly higher than expected. The
11:06
sponsor is concerned about the trend and
11:08
wants an update. What should the project
11:11
manager do first? A recommend additional
11:14
contingency reserves to address the
11:16
variance. B. Update the risk register to
11:19
reflect the cost overrun. C. Analyze
11:22
cost performance and calculate the cost
11:24
performance index. D. Schedule a meeting
11:28
with the sponsor to explain the cost
11:29
variance and corrective actions. You can
11:32
pause the video here if you need more
11:34
time to work on the question. The
11:36
correct answer is C. This question tests
11:40
your ability to apply earn value
11:42
management principles to monitor and
11:44
control project costs. Specifically, it
11:46
focuses on what action a project manager
11:48
should take first when there's evidence
11:50
of overspending. Choice C is the best
11:53
option because the cost performance
11:54
index is the standard PMI metric used to
11:57
measure cost efficiency. It's the first
11:59
step in diagnosing the root cause of a
12:01
cost variance and preparing a
12:03
data-driven response for stakeholders.
12:06
Choice A is incorrect, recommending
12:08
additional reserves is premature. The PM
12:11
must first assess the cost variance
12:13
using proper performance metrics before
12:15
considering budget changes. Choice B is
12:18
incorrect. Updating the risk register is
12:20
appropriate if a risk caused the
12:22
overrun, but here the root cause hasn't
12:24
been identified yet. Choice D is
12:27
incorrect. Meeting with the sponsor may
12:28
be necessary later, but it should come
12:31
after performing proper analysis. Acting
12:34
without understanding the numbers
12:36
weakens credibility. Let's move on to
12:38
the next question if you're ready.
12:40
Question 45.
12:43
A project is 60% complete based on
12:45
earned value analysis. The total project
12:48
budget, BAC, is $1 million and the
12:51
project has spent $700,000 so far.
12:54
However, the planned value at this point
12:56
in the schedule was $750,000.
13:00
What do the current EVM indicators
13:02
suggest? A, the project is under budget
13:05
and slightly ahead of schedule. B, the
13:07
project is over budget and slightly
13:09
behind schedule. C, the project is on
13:12
budget but significantly behind
13:14
schedule. D. The project is under budget
13:16
but behind schedule. You can pause the
13:19
video here if you need more time to work
13:21
on the question. The correct answer is
13:23
B. This question tests your ability to
13:26
apply core EVM formulas and interpret
13:29
cost and schedule performance. You must
13:32
calculate earned value and then compare
13:35
it to planned value and actual cost to
13:38
assess project health. Choice B is the
13:41
best option because earned value EV
13:45
equals 60% * $1 million equals $600,000.
13:51
Actual cost AC equals $700,000,
13:55
which means the project has spent more
13:57
than earned value. In other words, the
14:00
project is over budget. Planned value PV
14:03
is $750,000,
14:05
which means the project has completed
14:07
less than the planned value. In other
14:09
words, the project is behind schedule.
14:12
Choices A, C, and D are incorrect. Let's
14:15
move on to the next question if you're
14:17
ready. Question 46.
14:20
A project has the following performance
14:22
data. Budget at completion BAC $900,000.
14:28
Earned value EV is $450,000.
14:33
Actual cost AC is $500,000.
14:37
Plan value PV is $600,000.
14:41
What is the estimate at completion EAC
14:43
assuming current cost performance
14:45
continues? A $900,000
14:49
B $1 million C $1,200,000
14:54
D. $1,100,000.
14:58
You can pause the video here if you need
15:00
more time to work on the question. The
15:03
correct answer is B. This question tests
15:06
your knowledge of earned value
15:08
forecasting formulas. Specifically, how
15:11
to apply EAC when assuming current cost
15:14
performance will continue for the
15:15
remainder of the project. Choice B is
15:18
the best option because the correct
15:20
formula in this case is BAC equals BAC
15:25
divided by CPI where CPI = EV / AC =
15:31
450,000 / 500,000 = 0.9.
15:37
So EAC = 900,000 /.9
15:42
= $1 million.
15:44
Choices A, C, and D are incorrect. Let's
15:47
move on to the next question if you're
15:49
ready. Question 47. 3 months into a
15:53
predictive infrastructure project, the
15:55
project manager reviews earned value
15:57
metrics. Cost performance index equals
16:00
1.12.
16:02
Schedule performance index equals 0.85.
16:06
The sponsor requests a progress briefing
16:08
during the monthly governance review.
16:10
The project has strict delivery
16:12
milestones and limited schedule
16:14
flexibility. What should the project
16:16
manager report? A. The project is on
16:19
track to finish within budget but risks
16:22
delay if schedule performance doesn't
16:24
improve. B. The project's cost
16:26
efficiency is offsetting the schedule
16:28
delays, so no corrective action is
16:30
needed. The schedule performance is
16:33
acceptable for now, but costs must be
16:35
closely monitored going forward. D.
16:38
Since SPI is below one, the project is
16:40
at high risk of exceeding the budget
16:42
unless reserves are applied. You can
16:45
pause the video here if you need more
16:47
time to work on the question. The
16:49
correct answer is A. This question tests
16:52
your ability to interpret EVM metrics in
16:55
context, specifically CPI and SPI, and
16:59
communicate realistic project status
17:01
during governance reviews. In predictive
17:03
environments, both schedule and cost
17:05
metrics matter, especially when
17:07
milestones are fixed. Choice A is the
17:10
best option because a CPI of 1.12 shows
17:13
the project is spending efficiently.
17:15
It's getting more value for each dollar
17:17
spent. However, an SPI of 0.85 indicates
17:21
work is not progressing as quickly as
17:23
planned. With tight deadlines, this
17:25
presents a schedule risk that should be
17:27
communicated and addressed. Choice B is
17:30
incorrect. Cost efficiency is good, but
17:32
it does not eliminate the need to manage
17:34
delays, especially when deadlines are
17:36
inflexible. Choice C is incorrect. The
17:40
schedule performance is the main issue,
17:42
not cost. Focusing on cost diverts
17:44
attention from the primary concern.
17:47
Choice D is incorrect. SPI below one
17:49
reflects schedule risk, not cost
17:51
overrun. Applying reserves is not
17:53
appropriate unless there's a defined
17:55
risk being realized. Let's move on to
17:57
the next question if you're ready.
17:59
Question 48. During planning for a large
18:02
predictive project with multiple
18:04
subcontractors, the project manager
18:06
develops a detailed cost baseline.
18:08
However, the finance department informs
18:10
the PM that funding will be released in
18:12
quarterly installments not aligned with
18:15
the planned expenditures. What should
18:17
the project manager do next? A. Submit a
18:20
change request to adjust the scope and
18:22
reduce short-term costs. B. Reallocate
18:25
contingency reserves to cover early
18:27
expenditures and avoid delays. C.
18:30
Proceed with the original plan and flag
18:32
the funding constraint as a risk. D.
18:36
Adjust the schedule to align activities
18:38
with the timing of available funding.
18:40
You can pause the video here if you need
18:42
more time to work on the question. The
18:44
correct answer is D. This question tests
18:47
your understanding of funding limit
18:49
reconciliation which ensures that
18:51
planned expenditures align with the
18:53
actual availability of funds, a critical
18:55
element in cost management for
18:57
predictive projects. Choice D is the
19:00
best option because reconciling funding
19:03
constraints typically involves adjusting
19:05
the schedule to align with the funding
19:07
timeline. This keeps the project within
19:09
its approved funding limits and avoids
19:11
creating cash flow problems or needing
19:13
premature budget changes. Choice A is
19:16
incorrect. Adjusting the project scope
19:18
is unnecessary unless the funding issue
19:21
cannot be resolved through other
19:22
methods. This would be a more extreme
19:24
response. Choice B is incorrect.
19:27
Contingency reserves are for known
19:29
risks, not for managing cash flow
19:31
constraints. Misusing them could cause
19:33
budget issues later. Voice C is
19:35
incorrect. Simply flagging the issue as
19:38
a risk does not resolve the misalignment
19:40
and may lead to actual delays or cost
19:43
problems during execution. Let's move on
19:46
to the next question if you're ready.
19:48
Question 49. A project manager is
19:51
leading a predictive project to deliver
19:53
a custom data center for a public
19:54
agency. During planning, the sponsor
19:56
emphasizes minimizing total long-term
19:59
costs, including energy consumption,
20:01
maintenance, and system upgrades over
20:03
the facility's lifespan. What approach
20:06
should the project manager apply? A.
20:08
Incorporate life cycle costing into
20:10
decision-making during planning and
20:12
procurement. B. Use expected monetary
20:16
value EMV to assess risk costs during
20:19
execution rather than plan for long-term
20:21
operational expenses. C. Apply total
20:24
cost of ownership TCO analysis
20:27
separately during project planning to
20:29
estimate future costs. D. Prioritize
20:33
project cost reduction strategies to
20:36
minimize budget variance. You can pause
20:38
the video here if you need more time to
20:40
work on the question. The correct answer
20:42
is A. This question tests your
20:45
understanding of life cycle costing, a
20:47
cost management technique that considers
20:49
not just the project budget, but also
20:51
the total cost of ownership over the
20:53
product's lifetime. It's especially
20:55
relevant in predictive projects
20:57
involving infrastructure where long-term
21:00
maintenance, energy, and upgrade costs
21:02
significantly affect overall value.
21:05
Choice A is the best option because it
21:07
correctly applies life cycle costing
21:09
during project planning, ensuring
21:11
procurement and design decisions
21:13
consider both immediate and future
21:15
costs. Choice B is incorrect. EMV is a
21:19
valuable riskmanagement tool, but it
21:21
focuses on probabilistic cost outcomes,
21:24
not total long-term cost considerations.
21:26
It doesn't replace life cycle costing.
21:29
Choice C is incorrect. TCO and life
21:32
cycle costing are closely related, but
21:35
treating TCO as a separate analysis
21:37
outside of the integrated planning
21:39
process leads to fragmented
21:41
decision-making. The project manager
21:43
should embed life cycle thinking into
21:45
scope, procurement, and design
21:47
decisions. Choice D is incorrect.
21:50
Reducing cost during the project may
21:52
seem helpful, but it risks sacrificing
21:55
long-term value. For example, cutting
21:57
quality to stay under budget could
21:59
increase maintenance costs later. Let's
22:01
move on to the next question if you're
22:02
ready. Question 50. During cost planning
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for a complex predictive project, the
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team includes extra funds to address
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specific risks such as known site access
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delays and expected vendor price
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fluctuations. The sponsor later asks if
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additional budget should be set aside
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for unknown risks that may emerge during
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execution. How should the project
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manager respond? A. Recommend placing
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additional funds in the contingency
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reserve to address emerging unknown
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risks. B. Explain that the contingency
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reserve is already sufficient and covers
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all types of future uncertainties.
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C. Propose creating a management reserve
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under sponsor control to address
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unforeseen and undefined risks. D.
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Allocate a portion of the contingency
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reserve for management reserve to
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simplify oversight and approvals. You
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can pause the video here if you need
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more time to work on the question. The
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correct answer is C. This question tests
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your understanding of how reserves are
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categorized and managed in predictive
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projects, especially the distinction
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between contingency reserves and
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management reserves during cost
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planning. Toy C is the best option
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because PMI defines management reserves
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as funds set aside for unknown unknowns
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events that cannot be specifically
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identified during planning. These
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reserves are not included in the cost
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baseline and are typically controlled by
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upper management or the sponsor, not the
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project manager. Choice A is incorrect.
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Contingency reserves are for known
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unknowns or identified risks that have
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been analyzed. Using them for unknown
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risks would misapply their purpose.
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Choice B is incorrect. Contingency
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reserves do not cover all uncertainties.
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They do not account for unforeseen or
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undefined risks. That's what management
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reserves are for. Choice D is incorrect.
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Management reserves must be separately
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identified and managed outside of the
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cost baseline. Combining them with
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contingency reserves would violate cost
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planning best practices and reduce
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financial transparency. You've now
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completed all 10 questions for cost
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management and waterfall projects. Great
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work. You're now 50 questions into your
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PMP exam journey. Onethird of the way
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there. Stay sharp, stay focused, and
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let's keep pushing forward.