PROJECT COST MANAGEMENT

CHAPTER THREE:

DETERMINE BUDGET

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 Introduction
✓ Determine Budget is the process of aggregating the estimated
costs of individual activities or work packages to establish an
authorized cost baseline. The key benefit of this process is that
it determines the cost baseline against which project
performance can be monitored and controlled.

✓ A project budget includes all the funds authorized to execute the

project. The cost baseline is the approved version of the time-
phased project budget, but excludes management reserves.

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• The WBS is a required input to the cost budgeting
process since it defines the work items

– The Cost Budget is the estimate of total amount of

money required for carrying out the Project, including
money set aside for identified and unidentified risks
(i.e. unknown )

– The Cost Budget can be thought of as the Cost

Baseline over time plus the Management Reserves

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 Determine Budget

Inputs Tools & Techniques Outputs

1. Activity cost 1. Cost aggregation 1. Cost
estimates 2. Reserve analysis performance
2. Basis of estimates 3. Expert judgment baseline
3. Scope baseline 4. Historical relationships 2. Project
4. Project schedule 5. Funding limit funding
5. Resource calendars reconciliation requirements
6. Risk Register 3. Project
7. Contracts document
8. Agreements updates
9. Organizational
process assets
 Determine Budget: Inputs
1. Activity cost Estimates
✓ Cost estimates for each activity within a work package are
aggregated to obtain a cost estimate for each work package.

2. Basis of Estimates
✓ Supporting detail for cost estimates contained in the basis for
estimates should specify any basic assumptions dealing with
the inclusion or exclusion of indirect or other costs in the
project budget.

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3. Scope Baseline
✓ Project scope statement. Formal limitations by period for the
expenditure of project funds can be mandated by the organization,
by agreement or by other entities such as government agencies.
These funding constraints are reflected in the project scope
statement.

✓ Work breakdown structure. The WBS provides the relationships

among all the project deliverables and their various components.

✓ WBS dictionary. The WBS dictionary and related detailed

statements of work provide an identification of the deliverables and
a description of the work in each WBS component required to
produce each deliverable. 6
4. Project Schedule
• The project schedule includes planned start and finish dates for the
project’s activities, milestones, work packages, and control
accounts. This information can be used to aggregate costs to the
calendar periods in which the costs are planned to be incurred.

5. Resource calendars

• Resource calendars provide information on which resources are

assigned to the project and when they are assigned. This
information can be used to indicate resource costs over the
duration of the project.
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6. Risk register

• The risk register should be reviewed to consider how to aggregate

the risk response costs. Updates to the risk register are included
with project document updates

7. Agreements

• Applicable agreement information and costs relating to products,

services, or results that have been or will be purchased are included
when determining the budget.

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8. Organizational Process Assets

The organizational process assets that influence the Determine Budget

process include, but are not limited to:

• Existing formal and informal cost budgeting-related policies,

procedures, and guidelines;

• Cost budgeting tools; and

• Reporting methods.

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 Determine Budget: Tools and techniques
1. Cost Aggregation
• Cost aggregation is defined as summing the cost for the individual
work package to control the financial account up to the project level.
• This is achieved by the summation of the lower-level cost estimates that
are associated with different work packages within the work breakdown
structure.
• The work package cost estimates are then aggregated for the higher
component levels of the WBS (such as control accounts) and ultimately
for the entire project.
• This will allow project managers to see the activities as well as the
corresponding costs
• The main output of cost aggregate is the determination of the cost-
performance baseline 10
2. Reserve Analysis
• Budget reserve analysis can establish both the contingency
reserves and the management reserves for the project.

• Many cost estimators include reserves, also called contingency

allowances, as costs in many schedule activity cost estimates.

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3. Expert Judgment
• Expert judgment, guided by experience in an application area,
Knowledge Area, discipline, industry, or similar project, aids in
determining the budget. Such expertise may be provided by any
group or person with specialized education, knowledge, skill,
experience, or training. Expert judgment is available from many
sources, including, but not limited to:
• Other units within the performing organization,
• Consultants,
• Stakeholders, including customers,
• Professional and technical associations, and
• Industry groups.
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4. Historical relationships
• Any historical relationships that result in parametric estimates
or analogous estimates involve the use of project
characteristics (parameters) to develop mathematical models to
predict total project costs. Such models may be simple (e.g.,
residential home construction is based on a certain cost per
square foot of space) or complex (e.g., one model of software
development costing uses multiple separate adjustment factors,
each of which has numerous points within it).

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 Historical relationships
• Both the cost and accuracy of analogous and parametric
models can vary widely. They are most likely to be reliable
when:
✓ Historical information used to develop the model is
accurate,
✓ Parameters used in the model are readily quantifiable,
and
✓ Models are scalable, such that they work for large
projects, small projects, and phases of a project.

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5. Funding Limit reconciliation
• There are different tools that allow project managers to do cost
budgeting and one of the methods is the funding limit
reconciliation.
• It involves the comparison and adjustment of the funding limits
and the estimated costs by refining the scope and schedule of the
project activities.
• A variance between the funding limits and the planned
expenditures will sometimes necessitate the rescheduling of
work to level out the rate of expenditures.

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 Funding Limit reconciliation

Most organizations usually have limited resources to fund their

projects and this affects the cash flow of the entire organization. In
most cases, the funding is based on every quarter or for the fiscal
year. It is important for the project budget to follow the constraints
imposed by the funding limit reconciliation

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 Determine Budget: outputs

1. Cost Baseline
• The cost baseline is the approved version of the time-phased project
budget, excluding any management reserves, which can only be
changed through formal change control procedures and is used as a
basis for comparison to actual results. It is developed as a
summation of the approved budgets for the different schedule
activities.

✓ Cost Baseline = Project Cost Estimates + Contingency Reserves

✓ Cost Budget = Cost baseline + Management reserves

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The various components of the project budget and cost baseline.
• Activity cost estimates for the various project activities along with
any contingency reserves for these activities are aggregated into
their associated work package costs.
• The work package cost estimates, along with any contingency
reserves estimated for the work packages, are aggregated into
control accounts. The summation of the control accounts make up
the cost baseline.
• Since the cost estimates that make up the cost baseline are directly
tied to the schedule activities, this enables a time-phased view of
the cost baseline, which is typically displayed in the form of an S-
curve
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• Baseline estimated costs for the project components (items and
aggregates of items) are determined in current year dollars.
These components may be estimated using different techniques
depending on the level of scope definition and the size and
complexity of the project. The number and detail of
components estimated may vary depending on the data
available at the time of the estimate

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 Management reserves are added to the cost baseline to produce the project budget. As changes warranting the
use of management reserves arise, the change control process is used to obtain approval to move the applicable
management reserve funds into the cost baseline.

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Project Management
Budget Reserve

Cost Control Contingency

Baseline Accounts Reserve

Work Package Activity

Cost Estimates Contingency Reserve

Activity Cost
Estimates
Total Amount

Project Budget Component

Project Budget components 20

Summary: Cost Baseline vs Budget
• Remember the simplified formulas in order to understand the differences between
Cost Baseline and Budget:
• Management Reserves: management reserves are money added to the project
overall budget by the senior management for uncertain events that are not even
thought of (also known as “unknown unknowns”, i.e. risks not shown in the risk
register)
• Contingency Reserves: contingency reserves are money added to the project
cost estimates by the project manager for uncertain events / risks that might
happen (also known as “known unknowns”)
• Cost Estimate = sum of costs for work packages/activities
• Cost Estimate: the aggregated costs for the work packages or activities of the
project without making allowances for risks
• Cost Baseline = Cost Estimate + Contingency Reserve
• Cost Budget = Cost Baseline + Management Reserve 21
 Example:
Concept of Cost Baseline vs Budget
• Ali , a promising project manager, has determined to get certified through
self-study and you have chosen one of the cheapest online training course
to get the 35 Contact Hours Certificate in order to be eligible for the exam,
you budget for getting Certification is as follow:

• Membership Fee: US$139

• Project Management Training through self-study: US$199

• Exam Fee (for Member): US$405

• You may also need to set aside budget for miscellaneous items (e.g.
transportation, exam Prep book , mock exams etc.): US$300

• Certification Cost: US$1043 which is the cost estimate for the Project
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• Ali will also need to set aside budget for any identified risks (e.g. unable
to finish preparation on time — postpone the exam, need extra learning
aids as the exam is unexpected difficult, re-exam after a fail, etc.) which is
expected to be US$500 (Contingency Reserve).

• Ali is also advised to set aside money for any unknown unknowns which is
set at around 10% of the Cost Estimate at this time (according to his own
decision), i.e. US$100 (Management Reserve) .

• Therefore, for the Certification Project,

• Total Cost Baseline = Cost Estimate + Contingency Reserve = US$1043 +

US$500 = US$1543

• Total Cost Budget = Cost Baseline + Management Reserve = US$1043 +

US$500 + US$100 = US$1643
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2. Project Funding requirements
• The total funds required are those included in the cost baseline,
plus management reserves, if any. Project funding requirements are
the total amount of money spent on the project.
• There are two types of funding management requirement and these
include the total funding requirement and the period
requirement.
• The total funding requirement is defined as the cost that is
identified in the cost baseline. It also includes the management
reserves. The period funding requirement is defined as the annual
and quarterly payments..
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• Both of these funding requirements are derived from the cost
baseline.
• Funding often occurs in incremental amounts that are not
continuous, and may not be evenly distributed.
• Funding requirements may include the source (s) of the funding

3. Project documents updates

• Project documents that may be updated include, but are not limited
to:
✓ Risk register,
✓ Activity cost estimates, and
✓ Project schedule.

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