Once You Estimate Project Costs, Determine The Budget Of Your Project!


Determine Budget

“Never base your budget requests on realistic assumptions, as this could lead to a decrease in your funding.”

— Scott Adams, Dilbert

Determining budget is a project management activity to put together all identified costs for project activities and to come up with a cost baseline.

This cost baseline is very helpful in determining project performance. In Control Costs process current cost figures are compared against cost baseline to determine whether project is consuming more budget than allocated or less.

What do you need?

Cost management plan talks about processes around managing cost on the project is the guiding document and so first input for this process.

You will get cost estimates of individual activities (or tasks) while estimating project costs. You would need to refer to the scope baseline (containing project scope statement, WBS and WBS dictionary), project schedule and resource calendars while determining budget, to ensure that none of activities that cost money are missed out from consideration.

Budgeting is closely associated with identifying risks related to project cost, so Risk register is another important document to consider.

When you decide to contract out some part of your project work there are costs associated with floating request for proposal, calling in responses, giving out the work, and examining their outputs for conformance to requirements. All these costs have to be considered while coming up with budget. All these activities related to procurement management are explained in Project Procurement Management knowledge area. Hence, contracts and agreements too need to be considered.

You can save loads of time by using organizational templates, sample documents and tips from project managers of earlier projects. You will also need to consider any policies, procedures and guidelines around cost budgeting that your organization may have in place.

How do you do it?

Basically you just sum up the activity costs to get project budget. You simply roll them up to their corresponding WBS components, or control accounts, to arrive at the final budget figure.

What is the difference between Contingency reserve and Management reserve?

Contingency reserve is for situations when some of the identified risks materialize and you need money to manage those risks. Management reserve is for situations when unplanned events occur that impact project constraints, and you would need money to fill those gaps.

Reserve analysis can establish both contingency reserve and management reserve.

Please note that management reserve is not part of the project cost baseline. This is because cost baseline constitutes of funds that are authorized to be spent for planned activities of the project, and management reserves are only for activities that come up as a result of unplanned changes to project scope or cost.

Hence, management reserve can be part of overall budget. They are not part of Earned Value Management calculations (we will see in Control Costs process) and the project manager would need to get approval to utilize the management reserve.

You cannot do this without involving experts who either have been trained or have gathered enough experience to do a good job at calculating project budget.

Funding limit reconciliation is a check and balance step you can take regularly to figure out whether your spending are more than the budget limits. If for some reason they go beyond, you need to find the reasons and put check on unnecessary expenditure. In some cases you may need to go back to sponsors and ask for more budget or reduction of scope.

Project Cost Baseline

A Baselined document is a configuration item – which means that any changes to it should be (a) approved by  the change control board, and (b) thus changed document is given a specific version.

What is baselining?

Baselining means formally approving a particular version of a document to be a reference. This will make sure that people use same version of the document for reference and it undergoes controlled changes.

Cost baseline is the first output of this process. This is also the Budget At Completion (BAC) of the project.

This is a summation of estimated costs for scheduled project activities plus contingency reserves for “known unknowns”.

Again, Cost baseline does not contain management reserves.

Why?

As we saw, cost baseline is a summation of estimated costs for scheduled project activities plus contingency reserves for “known unknowns”. Management reserve is for “unknown unknowns”, that is, for discovered activities that still fall under project scope. Because these are well within project scope you cannot go and ask for more budget for them and so cost for them come from management reserve.

Click here for more details about ‘knowns and unknowns’ and an interesting reference to this by United States Secretary of Defense Donald Rumsfeld..

What is the difference between Cost baseline and Project budget?

For this, let us see how to build costs at activity level into project budget.

  • Cost estimates at activity levels do not inherently contain any buffer/reserve. Summing activity cost estimates and any activity contingency reserves up to work-package level (refer Create WBS process) gives us Work-package cost estimates.
  • Further, summing up Work-package cost estimates and contingency reserves to control account level gives us cost estimates at Control accounts.
  • Summing up of all control accounts cost estimates give us the Cost baseline!
  • Now add to this the reserve for “unknown unknowns”, which is the management reserve, and you get Project Budget!

Let us understand this using a simple cost-buildup diagram
project budget

You need to figure out periodic intervals when partial budgeted amount needs to be released towards project expenses. This depends on projected expenditure plan, which is prepared based on when certain resources are required during project execution.

For instance, once you have version 1.0 of your e-commerce application developed, you may need to do an exhaustive security audit on it. You might need a funding release to happen around this time.

Cost baseline = projected expenditures + anticipated liabilities

Total project funds (or total allocated budget, TAB) = cost baseline + management reserve

Funding is released at specific intervals, the amount and frequency may not be same. Look at the S-curve below to understand this –

project cost s-curve

You may end up updating few project related documents during this process such as risk register, cost estimates and project schedule. If those are baselined documents then you will need to run through Change Control project management activity.

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