6b - Budget
Project Cost Management
• Concerned with estimating, budgeting, and controlling costs to finish a project within the approved budget.
• Also considers long-term operation, maintenance, and support costs of the final deliverable.
• Earliest stages offer the greatest leverage for cost influence ⇒ importance of early scope definition.
Four Core Processes
Plan Cost Management
Estimate Costs
Determine Budget
Control Costs
1 Plan Cost Management
• Establish policies, procedures, and documentation for planning & controlling costs; output is the Cost Management Plan.
Typical CMP Components
• Units of measure (e.g., staff-hours, lump sum).
• Level of precision – rounding rules.
• Level of accuracy – acceptable range, e.g., \pm 10\% plus contingency.
• Organizational procedure links – WBS control account codes tied to accounting system.
• Control thresholds – variance limits (usually percentage deviations).
• Rules of performance measurement – Earned Value rules, weighted milestones, percent complete triggers.
• Reporting formats – frequency & layout of cost reports.
• Process descriptions – detail each of the three downstream cost processes.
2 Estimate Costs
• Approximate monetary resources needed for each activity and aggregate work package.
• Iterative: accuracy improves as project information matures (e.g., early Rough Order of Magnitude \approx \pm 50\%, later \approx \pm 10\%).
• Consider direct and indirect costs; decide upfront if estimates will include both.
Inputs
• Cost Management Plan, HR Plan, Scope Baseline (Statement + WBS + Dictionary).
• Project schedule, risk register.
• EEFs: market conditions, published cost data.
• OPAs: policies, templates, historical info, lessons learned.
Techniques
• Expert judgment
• Analogous (top-down) – fast, low cost, less accurate.
• Parametric – statistical models using historical data; potentially high accuracy.
• Bottom-up – estimate work-package detail then roll-up.
• Three-point estimating (PERT beta):
CE = \frac{Co + 4CM + C_p}{6}
• Reserve analysis (contingency & management reserves).
• Cost of Quality (COQ) – \text{Conformance} + \text{Non-conformance}.
• Project management estimating software.
• Vendor bid analysis
• Group decision techniques.
Outputs
• Activity cost estimates
• Basis of estimates detailing assumptions, constraints, allowed range, confidence level.
• Project document updates.
3 Determine Budget
• Aggregate activity/work-package estimates to create the Cost Baseline (time-phased).
• Management reserves are outside the baseline but within total project budget.
Funding Requirements
• Derived from cost baseline; expressed in incremental (e.g., annual) disbursements.
4 Control Costs
• Monitor project to update budget and manage changes to the cost baseline.
• Key activities:
– Influence cost-change factors.
– Ensure timely action on change requests.
– Prevent unauthorized cost/usage reporting.
– Keep expenditures within authorized funding by period & total.
– Analyze cost variances; integrate with overall change control.
• Essential to alert stakeholders and bring overruns within acceptable limits.
Earned Value Management System (EVMS)
Purpose
• Extends PM capability to track what was budgeted, what was accomplished, what it cost, and what it will take to finish; mandated on many major government contracts.
Core Questions EVMS Answers
• What did we say we’d do & when?
• How much did we think it would cost?
• What have we done so far?
• What did it really cost?
• What will it cost/when will we finish?
• Why are there differences & how do we mitigate?
Key Terms
• BCWS – Budgeted Cost of Work Scheduled (planned value).
• BCWP – Budgeted Cost of Work Performed (earned value); value of work accomplished based on original estimate.
• ACWP – Actual Cost of Work Performed (actual cost).
• ETC – Estimate to Complete (re-estimate for remaining work).
• BAC – Budget at Completion (total planned budget).
• EAC – Estimate at Completion: EAC = ACWP + ETC.
Variance & Performance Metrics
• Cost Variance (CV): CV = BCWP - ACWP (positive = under budget).
• Schedule Variance (SV): SV = BCWP - BCWS (positive = ahead of schedule).
• Variance at Completion (VAC): VAC = BAC - EAC.
Earned Value Calculation Methods
• Percent-Complete Method – Team estimates % complete; BCWP = % × budget for each activity. Example: “2⁄3 finished” ⇒ 66.7\% complete.
Practical & Ethical Implications
• Strong management commitment signals ethical responsibility for worker welfare.
• Transparent cost estimating and EVMS practices deter cost overruns/fraud and build stakeholder trust.
• Early identification of both safety hazards and cost risks prevents harm, saves money, and supports sustainable project success.