#PM Cost Management—A Closer Look at Tools & Techniques of the Determine Budget Process


1. Introduction: Three stages of the Determine Budget Process

As we discussed in the previous post, there are three stages of the determine budget process:

Stage 1: Getting the bottom-up estimate of the project by “rolling up” the estimates of the individual activities that make up each work package, and then summing up the work packages in each control account, and then summing up these control accounts to get the project estimate.

NOTE: If the only estimate of the project is a top-down estimate (analogous or parametric estimate), then this must be refined to the greatest extent possible. However, be aware that a bottom-up estimate is always going to be more accurate than a top-down estimate, so it is more preferable, albeit more time-consuming.

Stage 2. The project estimate contains all the direct costs of the project. Then the indirect costs of a project, that is, costs for project management that are shared between all projects (such as the cost of project management software, for example), are added to the direct costs. To this amount are added the contingency reserves to handle risks accounted for in the risk register. This result is the cost baseline, the one that the performance is measured against in earned value analysis during the course of the project. Then to the cost baseline are added the management reserves to handle risks NOT accounted for in the risk register. This results in the cost budget. The management reserves can be authorized only by management and not the project manager.

Stage 3. After “rolling up” the estimates to get the cost baseline, they are “rolled across” in terms of the schedule to get the final time-phased budget that is called the cost performance baseline.

The three stages are represented graphically below.


Fig. 1 Three Stages of the Determine Budget Process


2. Tools & Techniques of Determine Budget Process

I have listed the inputs to the Determine Budget process, but have organized them and color-coded them based on the scheme of the diagram above so that you can see what inputs are for which stage in the process.

 

Name of Tool or Technique

Used for …

Explanation

1.

Historical Relationships

Stage 1

If top-down estimates such as parametric or analogous estimates were used to get the project estimate, these are refined as much as possible with historical data from other projects, either from company data or published industry data. 

2.

Cost Aggregation

Stage 1

Estimates for activities are “rolled up” into estimates for work packages , control accounts and the final project estimate. This is the heart of Stage 1 of the Determine Budget Process.

3.

Expert Judgment

Stage 1

Experts could be those in the company with relevant experience on similar projects (for top-down estimates), or could be those who have experience determining the budget for previous projects (for bottom-up estimates).

 They could also be consultants or those in industry groups or professional associations that have knowledge of budgets of similar projects (for top-down estimates).

4.

Reserve Analysis

Stage 2

This establishes the contingency reserves which are added to the project estimate to get the cost baseline, and the management reserves which are added on top of that to get the cost budget.

5.

Funding Limit Reconciliation

Stage 3

The expenditures on the project for any given period (monthly, quarterly) should be reconciled with the available funding limits from the company for that period. If funds are not sufficient in any given period, the work schedule may have to be adjusted or reconciled with the funding limits available.

These tools & techniques are appropriate for the different stages of the process which are color-coded in a similar way to the diagram above.

The next post will cover the outputs to the Determine Budget Process.

 

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