Section 7.2.1 Cost Budgeting: Inputs

Formal periodic limitations of the expenditure of project funds can be given in the project charter (Section 4.1.3.1) or contract. These funding constraints are reflected in the project scope statement, and can be due to annual funding authorizations by the buyer’s organization or other entities like government agencies.

.2 Work Breakdown Structure

The project work breakdown structure (WBS) (Section 5.3.3.2) provides the relationship among all the components of the project and the project deliverables (Section 4.4.3.1).

.3 WBS Dictionary

The WBS dictionary (Section 5.3.3.3) 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.

.4 Activity Cost Estimates

The cost estimates (Section 7.1.3.1) for each schedule activity within a work package are aggregated to obtain a cost estimate for each work package.

.5 Activity Cost Estimate Supporting Detail

Described in Section 7.1.3.2.

.6 Project Schedule

The project schedule (Section 6.5.3.1) includes planned start and finish dates for the project’s schedule activities, schedule milestones, work packages, planning packages, and control accounts. This information is used to aggregate costs to the calendar periods when the costs are planned to be incurred.

.7 Resource Calendars

Described in Section 6.3.3.4.

.8 Contract

Contract (Section 12.4.3.2) information related to what products, services, or results have been purchased — and their costs — are used in developing the budget.

.9 Cost Management Plan

The cost management plan component of the project management plan and other subsidiary plans are considered during cost budgeting.

Section 7.2.2 Cost Budgeting: Tools and Techniques

Reserve analysis (Section 11.6.2.5) establishes contingency reserves, such as the management contingency reserve, that are allowances for unplanned, but potentially required, changes. Such changes may result from risks identified in the risk register

Management contingency reserves are budgets reserved for unplanned, but potentially required, changes to project scope and cost. These are “unknown unknowns,” and the project manager must obtain approval before obligating or spending this reserve. Management contingency reserves are not a part of the project cost baseline, but are included in the budget for the project. They are not distributed as budget and, therefore, are not a part of the earned value calculations.

.3 Parametric Estimating

The parametric estimating technique involves using project characteristics (parameters) in a mathematical model to predict total project costs. Models can be simple (e.g., residential home construction will cost a certain amount per square foot of living space) or complex (e.g., one model of software development costs uses thirteen separate adjustment factors, each of which has five to seven points within it).

Both the cost and accuracy of parametric models vary widely. They are most likely to be reliable when:

• The historical information used to develop the model is accurate

• The parameters used in the model are readily quantifiable

• The model is scalable, such that it works for a large project as well as a small one.

.4 Funding Limit Reconciliation

Large variations in the periodic expenditure of funds are usually undesirable for organizational operations. Therefore, the expenditure of funds is reconciled with the funding limits set by the customer or performing organization on the disbursement of funds for the project. Reconciliation will necessitate the scheduling of work to be adjusted to smooth or regulate those expenditures, which is accomplished by placing imposed date constraints for some work packages, schedule milestones, or WBS components into the project schedule. Rescheduling can impact the allocation of resources. If funds were used as a limiting resource in the Schedule Development process, then the process is repeated using the new imposed date constraints. The final product of these planning iterations is a cost baseline.

Section 7.2.3 Cost Budgeting: Outputs

The cost baseline is a time-phased budget that is used as a basis against which to measure, monitor, and control overall cost performance on the project. It is developed by summing estimated costs by period and is usually displayed in the form of an S-curve, as illustrated in Figure 7-5. The cost baseline is a component of the project management plan.

Many projects, especially large ones, have multiple cost or resource baselines, and consumables production baselines (e.g., cubic yards of concrete per day) to measure different aspects of project performance. For example, management may require that the project manager track internal costs (labor) separately from external costs (contractors and construction materials) or total labor hours.

.2 Project Funding Requirements

Funding requirements, total and periodic (e.g., annual or quarterly), are derived from the cost baseline and can be established to exceed, usually by a margin, to allow for either early progress or cost overruns. Funding usually occurs in incremental amounts that are not continuous, and, therefore, appears as a step function in Figure 7-5. The total funds required are those included in the cost baseline plus the management contingency reserve amount. Some portion of the management contingency reserve can be included incrementally in each funding step or funded when needed, depending on organizational policies.

Although Figure 7-5 shows the management reserve amount at the end of the project, in reality, the cost baseline and cash flow lines would increase when a portion of the management reserve is authorized and when it is spent. Any gap at the end of a project between the funds allocated and the cost baseline and cash flow amounts shows the amount of the management reserve that was not used.

Figure 7-5. Cash Flow, Cost Baseline and Funding Display

If approved change requests (Section 4.4.1.4) result from the Cost Budgeting process, then the cost management plan component of the project management plan is updated if those approved changes impact the management of costs.

.4 Requested Changes

The Cost Budgeting process can generate requested changes (Section 4.4.3.2) that affect the cost management plan or other components of the project management plan. Requested changes are processed for review and disposition through the Integrated Change Control process (Section 4.6).