Cost Budgeting

Cost budgeting is closely tied to the previous section. It involves establishing a cost baseline by allocating costs to activities or work packages. This baseline is used to measure performance during the execution of the project. A key point to remember is that even though you may turn in a final budget, the numbers with which you are working are still estimates because they measure actions to be taken in the future. They are not accounting numbers that give accurate measurement to past occurrences; they are approximations (in some cases accurate approximations) of what is to come.

The inputs to cost budgeting are the project Scope Statement, the WBS, a WBS dictionary, cost estimates, cost estimate supporting detail, project schedule, resource calendars, contracts, and the cost management plan. The project Scope Statement becomes the document upon which all budgeting decisions are based. The project manager will use the project Scope Statement and its decomposed cousin, the WBS, to make sure that the costs are estimated as carefully as possible. In the budgeting process, allocation of limited resources occurs as the funding for the entire project is considered when doing the final budgeting. Resources, whether they are capital or people, are always limited in some way in all organizations. The WBS dictionary gives details that are not in the WBS itself. By using the dictionary, you can get a level of detail that will help you put your budget together.

Q.	Detail of the WBS for doing your budgeting is found in the ________.
		A.	SOW
		B.	WBS dictionary
		C.	Schedule
		D.	Charter

The answer is B. Use the dictionary as a tool to look at detail in the overall project task system. This will help give you better figures for use in your cost budgeting.

The project schedule that was discussed in the previous chapter shows planned start and finish dates for the various tasks needed to complete the project. Particularly if you are doing a very complex project that will take more than six months, you will need to estimate when costs will occur so that budgeting is done to match the expected times for capital outlay.

Q.	The planned start and finish dates for the tasks in the project are shown in the:
		A.	Scope Statement
		B.	Charter
		C.	Project schedule
		D.	Risk management plan

The answer is C. The project schedule is your measurement tool to use when determining when you will need to make expenditures to get the various parts of the project done.

Q.	Risk events that occur that were totally unexpected are called:
		A.	Tactical problems
		B.	Unknown unknowns
		C.	Known unknowns
		D.	Glaring mistakes

The answer is B. Unknown unknowns are events that occur that are unexpected. You can plan for their cost by putting together a budget specifically linked to these types of events.

Q.	When you allocate a budget to risk events that you expect to occur but are not sure when they will occur, you are dealing with:
		A.	Known unknowns
		B.	Unknown unknowns
		C.	Capital issues
		D.	Forced expenditure

The answer is A. You know about the possibility of the risk event occurring but cannot pinpoint when it will occur.

The various tools and techniques described in the cost budgeting section are cost aggregation, reserve analysis, parametric estimating, and funding limit reconciliation. The concept of cost aggregation simply means that you aggregate all the costs in one level of task in the WBS, and this will be the cost of the task above. An example of this would be four tasks on the third level of the WBS that each have a cost of $10,000. The second level of the WBS thus would show $40,000.

Reserve analysis has been discussed before but deserves another look. Contingency reserves are those set aside for unplanned but potentially required changes. These are called unknown unknowns because the project manager doesn't know when the change will occur or whether it will occur at all.

The outputs from cost budgeting are the cost baseline, project funding requirements, updates on the cost management plan, and change requests. The cost baseline is the measurement you use throughout the project that measures the cost performance on the project. To show a cost baseline, which usually is represented as an S curve (see Figure 11-1), you sum all the costs for the time period you want to measure and show that as a baseline. Your actual costs are shown against the baseline and show how well you are performing against the plan. The baseline is your standard. Any variations from your baseline should go through some type of change control to note that the baseline has been altered.

Figure 11-1. Cost baseline represented as an S curve.

You will be showing the funding requirements for the project when you finish with cost budgeting. It is still an estimate, but it should be as close to the actual cost as you can possibly get it. During this part of project planning, you should work to make sure that the numbers shown are accurate, not just educated guesses.

Q.	The major output of cost budgeting is the ________.
		A.	Summary of costs
		B.	Capital budget
		C.	Cost baseline
		D.	Capital baseline

The answer is C. The cost baseline is the budget that will be your measurement of costs for the project. It is usually time-phased so that you can look at a specific point in time and measure how you are doing against the baseline for that particular time.