Podcast episode 029: project cost budgeting [28:11m]: Play Now | Play in Popup | Download (2300)

furniture VidenovToday, I have a special treat in store for you.  Today I am going to let you preview one of the 89 PM PrepCast episodes that we offer through The pm411.org Project Management Podcast!  Today’s episode is on Project Cost Budgeting which is, of course, one of the many PM processes within PMI’s Cost Management Knowledge area.  During this episode, Cornelius Fichtner, of the PM Podcast, walks us through the difference between Cost Estimating and Cost Budgeting. Then discusses using the project schedule, the WBS, parametric estimating, the cost baseline, project funding requirements and other topics you need to understand to successfully pass the PMP.

Cost Budgeting is concerned with rolling the cost of individual work packages up to a total project baseline cost that can be monitored as part of the project’s overall performance.

Cost Budgeting Process Inputs

In order to estimate the project budget needed successfully, Cost Budgeting uses several process inputs including:

• The Project Scope Statement
• The Work Breakdown Structure (WBS)
• The WBS Dictionary
• Activity Cost Estimates
• Activity Cost Estimate Supporting Detail
• Project Schedule
• Resource Calendars
• Contract
• And the Cost Management Plan

Each of these inputs are required when using the tools and techniques to estimate the overall project cost.

Cost Budgeting Process Tools and Techniques

Some of the tools and techniques used in Cost Budgeting include Cost Aggregation, Reserve Analysis, Parametric Estimating, and Funding Limit Reconciliation.

Cost Aggregation is simply estimating the cost estimate for each of the project schedule activities and work packages.  These can then be rolled up and “aggregated” to various cost management levels by using the WBS and combining the various related work package costs.  These are then further rolled up into the various control accounts and finally the overall project cost.  Simple enough, huh?

Reserve Analysis creates emergency or contingency reserves.  An example of such a reserve is the Management Contingency Reserve.  These reserves are for unplanned, but required, changes to project scope and cost.  These reserves are used for risks to the project that have been identified as “unknown unknowns”.  These reserves are not part of the project cost baseline, but should be included in the overall project budget.  Since they are not considered a part of the project cost baseline, they are not used for earned value calculations.  Think of Reserve Analysis as your extra money you keep in your checking account to prevent you from accidently bouncing checks to pay for your daughters highly variable wireless phone bill.  So, BTW did or didn’t Bettylou break up with her b/f? 

Parametric Estimation always reminds me of using a cookbook recipe and changing it slightly to either feed more or less people.  Basically you use an actual measurement from a similar previous project to estimate the cost of the current project.  For example, perhaps a previous project had a labor rate of $40/hr for 2500 hours for a total project labor cost of $100,000 .  You estimate through Cost Aggregation that this new project will take approximately 4000 hours.  By using parametric estimation with the same labor rate, you estimate the total labor cost for the new project to be approximately $160,000.  That’s a lot of pies!

Funding Limit Reconciliation is about “smoothing” out project expenditures to prevent sudden periodic over expenditures from occurring.  Fund disbursement is discussed early with the customer to determine the when exactly work can be scheduled to prevent over spending during a particular period.  If it is determined that Cost expenditures are constrained, then the Project Manager needs to know what effect this has on the overall project schedule and resources.

Cost Budgeting Outputs

The outputs generated by the Cost Budgeting Process include the project Cost Baseline, Project Funding Requirements, updated Cost Management Plan, and any requested changes.

The Cost Baseline is where the project budget is plotted against time to help monitor and control the project cost performance.  Once the baseline is created, actual project costs can be compared to the baseline to track project performance.

Funding Requirements are determined prior to the project commencing to allow funding to exist for early progress or particular cost overruns.  The total amount of the funding required for the project is determined by adding the cost baseline to the management contingency reserve amount.

Any updates to the Cost Management Plan are typically found as an output of the Cost Budgeting Process.  These updates require an approve change request to allow the Cost Baseline and any other cost attribute of the project to be updated.

And speaking of Requested Changes; requested changes can also be an output of the Cost Budgeting Process to allow the Cost Budgeting outputs to be updated as needed.

Hopefully, you will find Cost Budgeting a beneficial process for your project that provides you with early estimates, planned changes, and successful performance metrics for measuring your project’s budget success.  Now, I think I am going to go get some pie!

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