Budget Planning Overview

 

Key Points:

1. Budget Planning Overview:

   • The budget planning process follows the creation of the scope baseline and schedule.
   • The goal is to determine how much the project will cost by estimating, budgeting, managing, monitoring, and controlling project expenses.

2. Plan Cost Management Process:

   • Produces the Cost Management Plan.
   • This plan defines:
     • How costs will be estimated and budgeted.
     • Methods for managing and controlling costs.
     • Monitoring and reporting mechanisms.

3. Cost Estimation Variability:

   • Cost estimation methods vary widely based on the project type:
     • Large construction projects (e.g., government-funded) require different techniques compared to smaller projects (e.g., software development).
   • The Cost Management Plan is unique to the business and project.

4. Key Cost Terms:

   • Fixed Costs: Costs that remain constant throughout the project (e.g., rental fees, salaries).
   • Variable Costs: Costs that change frequently (e.g., fuel costs).
   • Direct Costs: Expenses directly included in the project budget (e.g., resources, equipment).
   • Indirect Costs: Overhead costs not included in the project budget (e.g., manager's time, administrative support).
   • Sunk Costs: Money already spent on the project (e.g., "sunk $30 million").

5. Value Engineering:

   • A project management technique focused on finding less costly ways of accomplishing work without compromising quality.
   • A key skill for project managers to deliver great work at a great price.

6. Components of the Cost Management Plan:

   • Budget Creation:
     • Establishes methods for cost estimation and budget structure.
   • Units of Measurement:
     • Defines how costs will be measured (e.g., dollars, hours).
   • Level of Accuracy:
     • Specifies allowable variance in cost estimates (e.g., ±10% or ±15%).
   • Control Thresholds:
     • Identifies acceptable limits before budget deviations are considered a problem (e.g., 10% or 20% over budget).
   • Reporting Formats:
     • Details how cost data will be reported (e.g., frequency, format).

7. Execution and Control:

   • The Cost Management Plan guides how the project budget will be monitored and controlled to ensure the project remains on track.

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Summary:

The Cost Management Plan is a critical output of the budget planning process, defining how project costs are estimated, budgeted, and controlled. It includes elements like fixed and variable costs, direct and indirect costs, and methods for managing value engineering. Unique to each project, the plan establishes units of measurement, accuracy levels, and control thresholds, ensuring cost management aligns with project and organizational requirements. With the plan in place, the next step is to create and execute the project budget.