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:
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.
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.
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.
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 - 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:
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.
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.
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.
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.
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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.