Determine Budget

Determine budget – how much will this cost!

It is useful to first understand where we are in the planning process. An activity list was created and sequenced into a simple network diagram. The amount of resources and the duration of each activity was then estimated to produce the project schedule baseline.

It is from this baseline that cost estimates for each activity was determined, and it is determine budget that converts those individuals activity cost estimates into the budget itself.

A budget in PMBOK is not just a sum of money. Its correct term is cost performance baseline.

Often, the word budget is used within an organization, as it is normally taken to mean a sum of allocated money for a project initiative, but here we will learn that we are referring to the cost performance baseline describing the spend of a project in detail mapped back against the time calendar.

Imagine a simple project consisting of just two activities one after the other, and the cost of each activity was $5000, and each activity has a duration of four weeks. Therefore, the project duration is eight weeks and the budget is $10,000.

Determine budget – cost plan

You could produce a simple cost graph with the vertical axis calibrated in dollars and the horizontal axis calibrated in weeks. If we assume that the planned cost per day is linear, then we can plot the planned cost on this graph as a straight line coming from the origin to a point that is aligned to $10,000 on the vertical axis and eight weeks on the horizontal axis:

determine budget

We have just created the cost performance baseline for that project as it takes the estimated project expenditures and aligns them with dates on the calendar. We could use this curve/straight line to show for example, that we are planned to spend $5000 by the fourth week within the project.

The main output from the determine budget process is the cost performance baseline – specifying not only what costs will be incurred, but when they will be incurred. This allows the organization that is running the project how to plan for cash flow to make suitable arrangements in advance and because likely expenditures are now known, how to plan for the supply of funds to the project.

The phrase ‘cash flow is king’ should be borne in mind by every project performing organization, hence when determine budget is being carried out, and the cost performance baseline will assist them in providing just enough money throughout the life of the project to ensure that it is funded correctly without tying up large amounts of money for the whole of the project.

Determine budget has seven inputs:

Activity cost estimates.

This is the main input into this process because it provides detailed cost information for each scheduled activity. These activities were derived from their unique work package, so by adding up the costs of each activity, every single work package can be given a total cost estimate.

Basis for estimates.

These will accompany each activity cost estimate and details the assumptions, reasons and approach used to determine each estimate. These help to determine an accurate cost estimate for each activity and hence the entire budget.

Scope baseline.

To remind you, the scope baseline contains the project scope statement, the WBS, and the WBS dictionary. The scope of a project defines precisely what is to be included and what is not, in short, it describes the boundaries, constraints and the reasons for the project requirements.

When designing the scope of a project, it is common to use techniques such as MOSCOW, the acronym standing for must have, should have, could have, or won’t have for now, as this is useful in determining both mandatory requirements as well as those that are just ‘nice to have’. All of these will have an affect when determine budget is carried out for the project, and so should be carefully considered here.

The WBS dictionary describes the attributes tying to each work package, and this information will also be helpful to determine budget.

The project schedule.

As described above, the cost performance baseline (sometimes called a spend plan), shows how much costs will be incurred and when that will occur and as such, the schedule is an important input to determine when such costs will be incurred.

Resource calendars.

In a similar manner, the resource calendars show when the resources are going to be used and will also described the date or time periods when they are available, for obvious reasons this will help plan when costs will be incurred.

Contracts.

If contracts are being used on this project, they will show the costs that the project is obliged to incur under the terms of the contract.

The terms of the contract may also specify certain types of resources – human or otherwise. Such constraints will almost certainly affect the cost and hence determine budget for the project. For this reason contracts must be used as an input when determining the cost performance baseline.

Organisational process assets.

There are many reasons why these should be an input to this process, an important one may the company policy, procedures or guidelines that must be used. Another may be the use or protocol of presenting financial information or the use of software tools.

Other helpful data here might be the use of historical information and lessons learned as well as estimating data that is useful for calculating the project budget.

There are three outputs from the determine budget process:

determine budget – Cost performance baseline.

As already mentioned, this specifies what costs will be incurred and when they will occur.

Costs may come under different categories such as human resource, materials, equipment, all different labour rates. For this reason the cost performance baseline may consist of several sub-baselines.

The cost performance baseline is sometimes called a spend plan or an ‘S curve’ because of the typical shape of the cost/time plan graph. The reason for this is that the rate of spent at the very beginning of the project is typically slow. Most cost will occur during the execution phases of a project so that the spending rate will be steep. As a project comes to an end, again the stage rates and hence slope is more shallow. This gives the traditional ‘S’ shape:

determine budget


 determine budget – The project funding requirements.

These are based in some way again the cost baseline, and hence refer to the planned expenditure of the project. But often, budget or cash input is requested in ‘chunks’, each one and just in time to fund the next spend period.

However it is to occur, the funding requirements must reflect the cash-flow needs of the project.

determine budget – Project document updates.

Whenever the actual cost requirements of a project are first calculated, it is common to consider changes to other already existing documents (usually in an attempt to reduce the funding requirements). Because of this, it is usual for changes to occur in terms of activities, resources, the project scope, or scheduling aspects of the project.

There are five tools used during the determine budget process:

Cost aggregation.

Up to this point, costs have only been estimated at an activity level which is normally the lowest level of cost management within a project. But it is important to aggregate, or sum up if you will, such costs to the work package level.

This is important because all costs are measured in the first place, and then managed and controlled at work package level throughout the project.

There may be other levels within the project where costs need to be aggregated, and these may include accounting node points within the WBS, internal or external accounting departments, and of course at the total project level.

Reserve analysis.

In effect, this is the risk budget and is sometimes called contingency or management reserve. This budget is there to provide for the response or impact of some or all of the project risks should they occur and forms part of the whole cost in the determine budget process..

Reserve analysis may be calculated on a percentage basis, or may only be applied to activities or work packages with high risk.

There are two schools of thought here, one is that a percentage padding is reasonable and quick, even though it is more of a guess than an estimate, and the other is that as part of professional risk management, each risk should contain the and cost impact should it occur, and this should be factored by the risk probability of the risk occurring.

The latter technique would be used to provide the reserve analysis. However it is performed, reserve analysis should be in proportion to the amount of risk within a project.

Expert judgement.

Since the project budget is formed on the basis of individual estimates, then this is probably the most importance to all that can be used. Remember that the knowledge skills and experience of individuals are vital to provide accurate time and cost estimates for the project.

In a perfect world, the person doing the estimating should be the person who is assigned to the activity. This has several benefits including personal commitment to delivering against the estimates, and also that the estimate will have been based on the person’s personal experience and skill level based from previous similar activities.

Historical relationships.

This refers to parametric estimating which is based on historical data. This will be implemented by factoring in the cost of project activities and multiplying them based on the ratio of this current activity. For example, if this were a 100 mile road, and a previous similar project found that construction costs were $300,000 per mile, then the cost of this current project could be determined based upon its length.

Funding limit reconciliation.

Because of the fiscal budgeting approach necessary within an organization, certain fiscal budget limitations may be allocated prior to the planning of a project. Now that the cost performance baseline and the project start date is known, it may be more than the fiscal funds available between now and after the next fiscal boundary.

This will normally have an impact on the project in terms of the spending window and the activities and considering those activities that can afford to be implemented. The outcome will often result in delaying implementation of some activities and hence extending the duration of the whole project.

This is ‘real world’, and it is therefore important to adjust the project cost baseline to harmonise with such constraints and limitations.

determine budget processDetermine Budget PMBOK Guide process

The budget for your project is its authorized funding, and the determine budget process is used to pull this together.  It consists of three elements:

Determine budget.

This is the process of aggregating the estimated costs of individual activities or work packages in order to establish an authorized cost baseline

Budget.

This is the approved estimate for the project or any work breakdown structure components or any schedule activity.

Budget at completion (BAC).

This is the sum of all of the budgets established by the work to be performed on the project or a work breakdown structure components or a schedule activity; the total planned value for the project.

To formulate the budget you will want to spread cost estimates across the schedule.  This will give you a time phase spending curve normally called the ‘S Curve’.  This it starts with looking at how scope, schedule and cost relate to each other.

For the process called Determine Budget, you will need various project documents and artefacts in order to create a reliable budget.  You will need to apply your organizations budget in policies and tools to keep the information organized.

Here is the diagram of the process showing inputs and outputs along with tools and techniques:

determine budget

Scope baseline.

The scope baseline provides the work breakdown structure and work breakdown structure dictionary that defines the detailed work for the project.  It also contains useful information such as project constraints.  Often, funding limitations are based on fiscal year budgets were only a fraction of the total budget can be used in the current year.

Such information needs to be compared with the project schedule and the cost estimates in order to develop an accurate and achievable budget.

The baseline is normally in the form of an ‘S curve’ as below:

determine budget

Project schedule.

Schedule and artifacts include the project schedule which as information on the planned start and finish dates for element activities of the project scope.  This will also contain information for start and finish dates for the work packages and even control accounts.  These can be helpful in aggregating costs by each specific work periods.

You will need to check the resource calendars to see when people are available and when they are assigned to carry out the work as this will often mean that you have to spread out work to accommodate funding limitations and also resource’s availability.

Cost management plan.

Cost estimates and the bases of estimates are applied to the work packages and the schedule in order to develop the funding needs over time.  You will also need to look at contracts to determine when payments for goods and services are due.

Let us now look at some of the tools and techniques used within the determined budget process.

When pulling together a budget you will often need expert judgment in the form of team members and quite probably representatives from your finance department.  How much information is required will depend on the size and complexity of the budget.

The main technique here is called cost aggregation.  You will use this in conjunction with reserve analysis and funding limit reconciliation.  You may also have available historical relationships which you can use to validate the budget curve.  We will now look at all of these aspects in more detail.

cost aggregation

Cost aggregation.

Cost aggregation is thus a minute of the costs for each work package up to the controller point and then upwards to the project level.  You will be able to aggregate this information by time.  In order to see the schedule spend for each time period.

First, here is a small portion of work package aggregation:

 determine budget

 Here is a simple example as a spreadsheet showing the cost aggregation at weekly and monthly time periods:

determine budget

 

Reserve analysis for Determining in the budget.

When developing a budget, reserve analysis takes into consideration both contingency reserve and management reserve. The PMBOK Guide defines reserve and contingency reserve, but not management reserve.

Contingency reserve.

This consists of the amount of funds, budget or time needed above the estimate to reduce the risk of overruns of project objectives to an acceptable level as determined by the organization.

This is a provision in the project management plan used to mitigate cost and/or schedule risk.  The term reserve is often used where the modifier such as management reserves or contingency reserve to provide further details on what types of risk are meant to be mitigated.

Contingency reserve refers to the risks are identified within the risk register and is used to reduce risk on the project by providing funds for specific deliverables, phases of the life-cycle, or the project as a whole.

Therefore contingency reserve is used to ensure that the project does not overrun its available funding.

It is important to understand that contingency funds are included in the cost baseline and the funding requirements.

Management reserve is for unplanned but in scope work, for example if some rework was needed within an agreed package of work.

Management reserve is not part of the cost baseline but it is part of the funding requirements.

Another consideration of reserve analysis is deciding how to allocate it.  Different activities, different work packages, and different phases may need different percentages of the reserve.

Funding limit reconciliation.

At your first attempt to lay down your cost estimates overtime and aggregate the funds by time periods, you should compare the results with any funding limitations that were identified within the scope statement.  Such a situation could cause you to reschedule the work in order to meet these funding limitations.

But barely this may cause you to extend the schedule although sometimes funding must be spent by a certain date or it is lost, in which case you may need to consider schedule acceleration.

Historic relationships.

A helpful way to check if your budget is valid, is to compare it to any historical data or standardized industry dates that show cost relationships.

Determine Budget – the outputs.

After you have balanced the scope, schedule, budget, risk, and funding limitations, you will have a viable cost baseline, your project budget, and your funding requirements.

You can then use that cost baseline to measure, monitor, and control your overall cost performance on the project.  When using earned value management, the cost performance baseline is referred to as the performance measurements baseline.

Cost performance baseline.

This is a specific version of the time phased budget and is used to compare actual expenditures against planned expenditures in order to determine if preventative or corrective action is needed to meet the project objectives.

Performance measurement baseline.

This is an approved integrated scope-schedule-cost plan for the project work against which the project execution is compared in order to measure and manage performance.

The contingency reserves are the difference between the cost performance baseline and the project budget.  The contingency reserve is used to address risks.

 

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David spent 25 years as a senior project manager for US multinationals and now develops a wide range of project-related downloadable video training products under the Primer brand. In addition, David runs training seminars across the world, and is a prolific writer on the many topics of project management. He currently lives in Spain with his wife Jude.