7.2 Determine Project Budget Process

Just as its name implies, the Determine Project Budget process results in the project's funding requirements and the project cost performance baseline.

This process occurs at least once on every project, but it's likely to reoccur many times during project planning and as change requests affecting costs are approved.

Since project costs are so closely aligned with other project management processes, most approved change requests will directly or indirectly impact the budget.

To create the project budget and cost baseline, we'll rely primarily on the activity cost estimates, but we'll also use the project scope statement, WBS, and any project contracts since they'll contain cost constraints.

Since both the project budget and project cost baseline will be aggregated to show costs by calendar periods, we'll need the schedule to determine when costs will be incurred.

The WBS can also be used to aggregate the activity cost estimates to the work package and deliverable level, providing another means of cost control and reporting.

Determine Budget Process Decomposition

Determine Budget Process Decomposition

Determine Budget Process: Inputs

  • Activity cost estimates
    Activity cost estimates are a complete accounting of all component costs, such as labor, resources, services, fees, licenses, of a scheduled activity. These can be presented in detail or summary form.
  • Basis of estimates
    The basis of estimates is the supporting detail to the activity cost estimates.
    What it contains depends upon the project and activity type, but it includes documentation on how the estimate was arrived at, what assumptions were made, what constraints were in place, its range of accuracy, and the confidence level in the estimate.
  • Scope baseline
    The scope baseline is the approved project scope statement, WBS, and WBS dictionary.
    These collections provide the deliverables, statements of work, constraints, and assumptions that are necessary for accurate budgeting.
  • Project schedule
    The project schedule specifies the planned start and finish date for each scheduled activity, and the accompanying schedule data provides the specific activities and resource requirements.
    The schedule is used to aggregate activity costs by calendar period.
  • Resource calendars
    Resource calendars indicate when and in what quantity resources are assigned to the project. These calendars help aggregate activity costs by calendar period.
  • Contracts
    If applicable to the project, contracts with outside personnel and organizations indicate monetary arrangements including payment amounts and schedule, which are necessary for budgeting.
  • Organizational process assets
    The organization will have formal or informal budgeting policies and procedures that must be followed. It may also provide tools that aid in project budgeting.

Determine Budget Process: Tools and Techniques

  • Cost aggregation
    Individual costs are aggregated in many different ways for budgeting purposes, including at the work package, deliverable, summary activity, or other classification levels.
  • Reserve analysis
    Reserves are time or cost buffers in the project schedule or budget that help the project respond to uncertainties. Reserve analysis monitors these buffers and will use, reduce, or eliminate them based on the current situation.
  • Expert judgment
    Expert judgment is based on the experience and knowledge of subject matter experts. It's used to assess and evaluate the inputs and the information they contain.
  • Historical relationships
    Historical relationships refer to the characteristics of the current and past projects that can be used to develop models that aid in budgeting.
  • Funding limit reconciliation
    Funding limit reconciliation matches the project's planned need for funding with the organization's ability to provide that funding.
    It can be thought of as "resource leveling" for finances because it reschedules activities to make sure that the budget for the scheduled activities doesn't exceed the available budget for that period.

Determine Budget Process: Outputs

  • Cost performance baseline
    The cost performance baseline is a time-phased budget that is used for project cost management, monitoring, and reporting.
    It is commonly shown as an S-curve graph. The cost baseline is a component of the project performance baseline.
  • Project funding requirements
    Project funding requirements refer to the entire estimated cost of the budget, including any contingency or management reserves.
  • Project document updates
    The budgeting process can result in updates to several project documents, including the risk register, activity cost estimates, and the project schedule.

Project Funding Requirements

The performing organization needs to know the financial costs of the project so that it can appropriate money.

The entire estimated cost of the budget, including any contingency or management reserves, is the project funding requirements. When we're referring to the project's budget, we're usually talking about project’s base costs.

Every organization will each have different requirements and terminology for the contents and categorization of the project budget, but a budget is usually classified in the same categories as what was used by the resource breakdown structure.

At a broad level, the budgetary classifications are generally:

  • Reserves.
  • Labor/Personnel.
  • Professional, Contracted, or Outside Services.
  • Supplies, Materials.
  • Equipment, Hardware, and Software.
  • Training, Travel.
  • Licenses, fees.
  • Indirect Costs.

The performing organization will also need to know when it can expect project costs to be incurred, so the project’s budget is also shown by calendar periods.

When broken down into a time-phased budget, this can also serve as the project cost performance baseline.

Cost Performance Baseline

In addition to knowing the project funding requirements, the performing organization needs to know when the project will need money.

The cost performance baseline is a time-phased budget that is used for project cost management, monitoring, and reporting.

Though they're both derived from the same source, the project budget and project cost baseline are not interchangeable terms.

Cost-related Baselines

Cost-related Baselines

The project cost baseline is normally shown as an S-curve graph, and other project accounting measures, like its actual project expenditures, are also shown plotted on the graph.

The project cost baseline can effectively show many different views of project performance.

Because it's such a useful graph, a project to have several different cost-related baselines that will focus on specific cost categories, such as labor costs, raw material costs, or any other cost classification that's necessary for monitoring.

Just as with all other baselines, the cost baseline reflects all approved changes.

Funding Limit Reconciliation

Funding limit reconciliation matches the project's planned need for funding with the organization's ability to provide that funding.

It can be thought of as "resource leveling" for finances because it reschedules activities to make sure that the budget for the scheduled activities doesn't exceed the available budget for that period.

For instance, if the estimated cost for scheduled activities in the second month of a project is estimated to be $50,000, but the organization can only provide funding for $40,000 then there is $10,000 of work that has to be rescheduled to another month.

 

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