Anticlue

Cost Budgeting

Cost Budgeting is the process of establishing a budget for the project. This is normally completed by summarizing the estimated costs of the work packages in order to establish a cost baseline. The cost baseline will help to assure that costs are appropriately allocated and distributed by managing changes and variances which affect project costs. The inputs to the cost budgeting process are:

• Project Scope Statement – The project scope statement will normally detail any limitations on budgets or due to contracting conditions.
• Work Breakdown Structure – The WBS details the dependencies between project activities and deliverables.
• WBS dictionary - The WBS dictionary lists the detail information for the work which needs to be completed to construct the project deliverables.
• Project Schedule - The Project Schedule provides the expected dates for specific activities and milestones.
• Activity cost estimates - Activity cost estimates help establish a cost baseline because they provide the cost estimate for each of the expected schedule activities including the resource cost for staff, equipment and materials.
• Activity cost estimate supporting detail - The supporting detail illustrates how the cost estimate was created and includes a description of the activity's scope of work, as well as any assumptions and constraints. It may also include a range of estimates that indicate the expected cost of an item.
• Resource calendars - Resource calendar help to establish when a resource is being utilized. The calendar shows holidays and the days that resources are available, as well as the quantity of each available resource. Sometimes a resource calendar even describes when and how resource costs will be incurred.
• Contract - The contract provides cost information on the resources purchased for the project. Larger projects may have more than one supplier, resulting in multiple contracts.
• Cost Management Plan – The cost management plan provides information about internal organizational processes and procedures that should be considered during Cost Budgeting. For instance, an organization may require that its project managers submit budgets to the financial manager for final signoff.

Once you have the inputs at a convenient place, and have a good understanding of the content provided, there are several tools and techniques which can help a pm create a realistic cost baseline. These tools are:

• Cost aggregation - Cost aggregation is utilized to determine total costs for deliverables and for an entire project. The final sum of the cost estimates is applied as the cost baseline.
  The steps to perform aggregation are the following:
  1. First detail the cost estimate to the work packages at the lowest level of the WBS.
  2. Next, Total the costs for all the activities belonging within the work package. Then summarize up to the next level. Repeat this process for each level in the WBS.
  3. Next, Calculate the Contingency Reserves if applicable
  4. Identify the dates for the cost baseline based on the project schedule.
• Reserve analysis - Contingency reserves are amounts of money set aside for unplanned changes to costs; they are part of the total budget, but they are not part of the cost baseline. The total budget is the approved cost estimate for the entire project. The cost baseline is a tool project managers use to monitor and control project expenditures.
• Parametric estimating - Parametric estimating is a technique that uses a statistical relationship between historical data and other variables to calculate an estimate.
• Funding limit reconciliation - Project managers use funding limit reconciliation to avoid large variations in the periodic expenditure of project funds. They do this by reconciling project expenditures with the funding limits set by the customer. Reconciliation may require the revision of project schedules to regulate expenditures; this in turn affects the allocation of resources.

Cost baselines enlighten project managers of the difference between current costs and what is estimated for future activities. A cost baseline also helps identify possible issues regarding current and future costs when expectations change.
The outputs from Cost Budgeting are:

• Cost baseline – The cost baseline illustrates estimated costs with the due dates for the work packages that incur the costs. It is used to monitor and control cost performance.
• Requested changes – Obviously requested changes will be requested as the project progresses.
• Project funding requirements - These requirements are conditions that account for the possibility that actual costs may exceed the estimated costs during different time frames.
• Cost Management Plan updates – The cost management plan needs to be updated with approved changes which may affect how costs are managed within the project.