Building the Budget

 

Key Points:

1. Building the Budget:

   • Objective: Aggregate the costs of individual activities to create the cost baseline.
   • Example: If a project has 10 activities, each costing $50, the total budget is $500.

2. Cost Baseline:

   • The cost baseline is the total authorized cost for the project, used to monitor and control performance.
   • It includes:
     • Costs of all activities.
     • Contingency reserves for known/unknown risks.

3. Key Processes in Budgeting:

   • Cost Aggregation:
     • Activities → Work Packages → Control Accounts → Total Cost.
     • Example: A work package with 10 activities, each costing $5, totals $50.
   • Reserve Analysis:
     • Contingency Reserves:
       • Controlled by the project manager for known/unknown risks.
       • Example: Adding $200 to a $1,000 budget for bad weather or material shortages.
     • Management Reserves:
       • Controlled by the organization for unknown/unknown risks.
       • Example: Adding another $200 for unforeseen events like extreme weather or global disruptions.
   • Historical Review:
     • Compare costs to similar past projects to assess validity and identify discrepancies.
   • Funding Limit Reconciliation:
     • Align the project’s spending rate with the funding availability to avoid budget shortfalls.

4. Project Budget vs. Cost Baseline:

   • Cost Baseline:
     • Includes aggregated costs of activities and contingency reserves.
   • Project Budget:
     • Adds management reserves to the cost baseline.
     • Example:
       • Activities: $1,000.
       • Contingency: $200.
       • Management Reserves: $200.
       • Project Budget = $1,400.

5. Funding Requirements:

   • Specify when and how much funding is required at various stages of the project.
   • Funding may be tied to milestones or triggers (e.g., permits, project phases).

6. S-Curve Representation:

   • Illustrates project spending over time:
     • Cost Baseline Line: Represents planned costs.
     • Actual Cost Line: Tracks actual spending.
   • Deviations indicate if the project is over or under budget.

7. Planning Progress:

   • Completed Steps:
     • Scope Baseline: Defines what needs to be done.
     • Schedule Baseline: Specifies how long it will take.
     • Cost Baseline: Determines how much it will cost.
   • Remaining Steps:
     • Address risk, quality, staffing, communication, stakeholder engagement, and vendor management.

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Summary:

The process of determining the budget involves aggregating activity costs to create the cost baseline, which serves as the benchmark for monitoring and controlling project performance. The cost baseline includes contingency reserves for known/unknown risks, while the project budget adds management reserves for unforeseen risks. Key techniques include cost aggregation, reserve analysis, historical review, and funding limit reconciliation. Tools like S-curves help visualize and track budget adherence. While the budget establishes "how much," additional planning steps, such as addressing risk and quality, are necessary before project execution.