Cost Budgeting Process Techniques

Parametric Estimating

When specific schedule activities have not been defined and estimated, parametric estimating can be applied to the planning components to provide a high-level budget for the affected work. This will generally be necessary when the project is in the conceptual stage of development and the details of the work are not known. It is also true in rolling wave planning for later phases.

In this case, the later phases are not planned in detail, pending the availability of missing information. For the next phase, the necessary detail will be produced only as an outcome of the current work.

In these situations, using parametric estimating at the phase or other planning component level can set the budget.

For parametric estimating to be most effective, the following should be considered:

• The model that is used should be based on accurate historical information;
• The model should work for different sizes of projects (in other words, the model should be scalable); and
• The parameters used in the model should be quantifiable.

 Reserve analysis sets aside reserves to be used for unplanned changes. The changes might be due to anticipated risks and thus involve the cost of the contingency plan, or they might be due to an anticipated rate of errors and rework

("known unknowns", or contingency reserves). On the other hand, they might be the result of unexpected events that require workarounds, and for which no contingency plan exists ("unknown unknowns", or management reserves).

Management reserves are not part of the project cost baseline, but they are included in the budget for the project.

Cost budget reserves are discussed in more detail in a subsequent section.

Funding Limit Reconciliation

The timing of funds and planned costs for projects must solve two problems: solvency and fiscal timing.

For a project to be solvent, funds must always be available to meet planned costs. This means that, for any given period, the level of available funds will always be slightly higher than the amount required by the total time-phased budget baseline.

The principle is the same as the funding requirement for a personal bank checking account.

Funds must also match the timing of the planned costs within the organization's fiscal cycles.

This is the case even if the planned costs shift due to schedule changes. Funds are authorized for disbursement to the project in cycles that are set by the customer or organization to follow their fiscal cycles. The funds can then be spent only for work performed in the same fiscal cycle.

Example: Funds for work in a company's fiscal year 2015 will be disbursed shortly before the start of the fiscal year.

They can then be used only to pay for invoices that relate to work that was completed in the same fiscal year.

Unused funds expire at the end of the fiscal year, and, conversely, if there are overruns, they must be accommodated through additional funds disbursed in the same fiscal year.

Because work may accelerate or slip across fiscal cycle boundaries, every time the schedule changes, the funds made available must be reconciled with the actual budgeted costs.

When the disbursed funds cannot cover the additional costs, or when there will be excess funds in one cycle and a shortage in the next, the usual technique is to shift other portions of the work between the fiscal periods.

This maneuver reduces the overrun or consumes the excess.

This is done by imposing date constraints on some work packages, schedule milestones, or WBS components in the project schedule.

Reconciling the funding limit is normally performed by the finance function within the organization.

It is unusual to simply request changes in the fund disbursement schedule, because the planned expenditures on a given project must be balanced with the total available cash flow in the organization, taking into account the priorities of other projects and business operations.

If funding were constantly being shifted, managing the cash flow would become extremely difficult.

The Cost Budgeting process produces the following outputs:

• Cost baseline;
• Project funding requirements;
• Updates to the cost management plan; and
• Requested changes.

Cost Baseline

The primary goal of the Cost Budgeting process is to determine the cost baseline. Once the cost budget is approved, it becomes the cost baseline. The cost baseline will be used to measure and monitor cost performance on the project.

As noted earlier, the cost baseline is developed by summing estimated costs by period and is usually displayed in the form of an S-curve.

Some projects may have multiple cost or resource baselines to measure different aspects of project performance.

For example, internal labor costs may be tracked separately from external costs of contractors or from total labor hours.

Project Funding Requirements

Funding requirements are derived from the cost baseline and must exceed the cost baseline in every period by an amount that will cover expenditures associated with both early progress and cost overruns.

Funding occurs in incremental amounts. Each increment must be sufficient to cover all expenditures in every period between the posting of the first increment and the posting of the next increment.