Determine Budget

1. Determine Project Budget

This process of aggregating the estimated costs of individual activities or work packages to establish an authorization cost baseline. This baseline includes all authorized budgets, but excludes management reserves.

The inputs, tools, techniques, and outputs of this process are describes below.

1.1 Determine Budget: Inputs 

The most important inputs to this process are the estimates determined in the previous process which is Cost Estimates. Other important inputs come from other knowledge areas such as Scope, Time, Human Resource, Risk and Procurement. This process requires the following inputs:

1.1.1 Cost Management Plan

This plan describes how the project costs will be managed and controlled

1.1.2 Scope Baseline
As described in the previous process which is Cost estimates, the scope baseline is a component of the project management plan and includes the product descriptions, acceptance criteria, key deliverables, project boundaries, assumptions, and constraints about the project.

It may also include requirements with contractual and legal implications for health, safety,security, performance, environmental, insurance, intellectual property rights, licenses and permits.

1.1.3 Activity Cost Estimates

These are outputs from the previous process which is Cost estimates

1.1.4 Basis of Estimates

Supporting detail for cost estimates should be specified as describes above. Any basic assumptions dealing with the inclusion or exclusion of indirect costs in the project budget are specified in the basis of estimates.

1.1.5 Project Schedule

As described in the previous process which is cost estimates, the project schedule includes a planned start date and planned finish date for each activity as well the resources required This information can be used to aggregate costs to the calendar period in which the costs are planned to be incurred.

1.1.6 Resource Calendars

These provide information on which resources are assigned to the project and when they are assigned. This information can be used to indicate resource costs over the duration of the project.

1.1.7 Risk Register

This is an output of process Identify Risks and is used to aggregate costs for risk responses to obtain the contingency reserves for the project.

1.1.8 Agreements

This is an output of procurement management process and applicable contract information and costs relating to products, services, or results that have been purchased are included when determining the budget.

1.1.9 Organizational Process Assets

These are the processes or process related assets that can be used in this process including: Existing formal and informal cost budgeting related to policies, procedures and guidelines as well as cost budgeting tools and reporting methods.

1.2 Determine Budget: Tools and Techniques 

There are five tools and techniques that can be used:

1.2.1 Cost Aggregation

Cost estimates are aggregated by work packages in accordance with the W.B.S. The work package cost estimates are then aggregated for the higher components levels of the W.B.S (such as control accounts) and ultimately for the entire project.

1.2.2 Reserves Analysis

This can be establish both the contingency reserves and the management reserves for the project.

1. Contingency reserves are allowance for unplanned but potentially required changes that can results from realized risks identified in the risk register.
2. Management reserves are budgets reserved for unplanned changes to project scope and cost.

1.2.3 Expert Judgment

This expertise is provided by any group or individual with specialized knowledge or training and is available from many resources, including: other units within the organization, consultants, stakeholders, including customers or sponsors, professional and technical associations, industry groups, subject matter experts, and project management office (P.M.O).

1.2.4 Historical Relationships

This refer to using historical data from other projects in which costs are known for the same or similar activities.

1.2.5 Funding Limit Reconciliation

The expenditures of funds should be reconciled with any funding limits on the commitment of funds for the project. A variance between the funding limits and the planned expenditures will sometimes mean rescheduling the work to level out the rate of expenditures. This can be accomplished by placing imposed date constraints for work into the project schedule.

Cost aggregation of the work packages produces the cost estimate of the project. Adding the cost of risk responses and contingency reserves produces the cost baseline. Adding the management reserves, which are not controlled by the project manager but by management, to the cost baseline, provides the cost budget. If the funding for the whole project is incremental, then care must be taken to ensure that the project does not run out of money as a result of getting too far ahead of the schedule.

1.3 Determine Budget: Outputs 

This process will create the following outputs:

1.3.1 Cost Performance Baseline

This specifies what costs will be incurred and when. This matters because most projects will not receive their funding as a lump sum at the beginning but will be financed according to a monthly or quarterly budget. This means that the project manager will need to indicate when funds need to be available.

The simplest way to produce a cost baseline would be to aggregate all of the anticipated costs of the project and assume that they would be needed in proportion to the planned timescale.

For example:

Project Total cost was $ 100,000
Project Planned to take 20 weeks

Then a simple cost graph could be produced with the vertical axis calibrated in dollars and the horizontal axis calibrated in weeks.

You could produce a simple cost graph by assuming that the planned cost per day was linear, that is as a straight line coming from the origin to a point that is aligned to $ 100,000 on the vertical axis and 20 weeks on the horizontal axis as shown:

We have just created the cost performance baseline for that project as it takes the estimated project expenditures and align them with dates on the Calendar. This allows the organization to plan for cash flow and to make suitable arrangements in advance so that the funds are available when needed and not before.

This might be accurate enough for a very simple project where both the labor and material costs were fairly constant from day to day. But for projects with any degree of complexity it is necessary to produce separate cost baselines for different categories of expenditure, such as human resources at different labor rates, plant, materials and other equipment.

For this reason the cost performance baseline may consist of several sub baselines, which can be aggregated to produce totals. In most projects the rate of expenditures is not linear but follows an "S" shaped curve as shown.

The reason for this is that the rate of spent at the beginning and end of the project is typically lower than that during the execution phase.

1.3.2 Project Funding Requirements

        These are derived from the cost baseline described above and need to reflect the cash flow needs of the project including management reserves and contingencies. They are an important output, because they may require the project schedule to be adjusted to the necessities of the periodic project funding requirements.

1.3.3 Project Document Updates

      This include the activity cost estimates, risk register and project schedule