#PM Cost Management—An Overview of the Determine Budget Process

1. Introduction

There are three PM processes involved with cost management. Two of them, Estimate Costs and Determine Budget, are in the Planning Process Group, and Control Costs is in the Monitoring & Controlling Process Group.

As mentioned in a previous post, some of the planning for cost management takes place in the Develop Project Management Plan process under the Initiation Process Group. Here the Cost Management Plan is created as one of the subsidiary components of the overall Project Management Plan.





Process Description
Planning 7.1 Estimate Costs Developing an approximation of the monetary resources needed to complete project activities.
7.2 Determine Budget Sums up the estimated costs and add reserves to establish an authorized cost baseline.
Monitoring & Controlling 7.3 Control Costs Monitoring the status of the project to update project budget and manage changes to the cost baseline.

2.  Determine Budget

Once the estimates are created in process 7.1 Estimate Costs, the next process 7.2 Determine Budget aggregates or adds together all the costs associated with the project in two steps:

Step 1: Aggregation of the individual activity estimates of the WBS work packages.  These are “rolled up” using the WBS to form the aggregates of the work packages and the control accounts, the accounting placeholders in the WBS where you sum up the work packages beneath them.

(NOTE: Although the aggregation process talks about “rolling up” the estimates, in the schematic I have the arrow going downwards to show the flow of the process.)

Step 2: To the project estimate (direct costs), indirect costs may be added. Then contingency reserves are added for those risks listed in the risk register; these reserves are to be used during the project at the discretion of the project manager. This gives the cost baseline.

Management reserves are then added for all unknown risks (i.e., those not accounted for in the risk register), but this amount, as opposed to the contingency reserves, CANNOT be used by the project manager except with permission of the sponsor of the project. This final figure is the overall cost budget.

Once you understand this overall schematic of how costs are aggregated, then the next posts on the inputs, and the tools & techniques of the Determine Budget process will make more sense.

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