Determine Budget Process

Determine Budget is one of the 42 project management processes described in the fourth edition PMBOK®. It’s one of the three Cost knowledge area processes, and one of the twenty Planning processes. The purpose of this process is to add up the estimated costs of the project activities in order to create the budget. These cost estimates and their explanations are found in Activity Cost Estimates and Basis of Estimates, which were outputs of the Estimate Costs process. Cost Aggregation is the fancy term for simply adding up these estimated costs. Additionally, there are a few other documents that are good to reference when developing the budget—the Scope Baseline, Project Schedule, Resource Calendars, and Contracts. The Scope Baseline should be referenced for mention of funding constraints. Assuring that the budget is within these funding constraints is called Funding Limit Aggregation. The Project Schedule and Resource Calendars are used as a basis for knowing how much to budget for different calendar periods of the project. For example, costs may be low for the first couple months, but according to the calendar, in the third month a substantial amount of material may need to be purchased and specialized labor hired, so more funds will be budgeted for that time. Contracts associated with the project should also be examined for agreed-upon costs.

While developing the budget, having some information available on relevant past costs is called Historical Relationships, and taking advantage of someone’s expertise in the area is called Expert Judgment.

The major outputs of Determine Budget are the Cost Performance Baseline and Project Funding Requirements. The Cost Performance Baseline is usually a graph illustrating the budget over the length of time of the project. It does not include reserves which are funds set aside in case they are needed. Please see the earlier posting of Reserve Analysis (posted February 11, 2009). Project Funding Requirements, however, includes the cost baseline in addition to any reserves.

Estimate Costs Process

Estimate Costs is one of the 42 project management processes described in the fourth edition PMBOK®. It’s one of the three Cost knowledge area processes, and one of the twenty Planning processes. The purpose of this process is to estimate how much money will be needed for the project activities. Although the purpose is straightforward, this process has more inputs, tools, and outputs than most—6 inputs, 9 tools and techniques and 3 outputs. It’s difficult to accurately estimate costs, especially at the beginning of a project, so these estimates are refined during the course of the project. Estimates at the beginning of a project could be over or under by 50% (called the rough order of magnitude), whereas later on the estimates may be within 10% of the actual costs.

The Human Resource Plan (from the Develop Human Resource Plan process) is used as a reference to help estimate costs associated with paying the people who are working on the project. The Scope Baseline (from the Create WBS process) contains information on the budget constraints in addition to the project activities and their inter-relationships. Like the Scope Baseline, the Project Schedule (from the Develop Schedule process) contains a large amount of information related to the needed resources and activity durations. Mitigation costs should also be calculated using the Risk Register (from the Identify Risks process) as a guide.

As mentioned, there are many tools that can be employed when estimating costs. When vendors are involved, there may need to be an overall analysis of what the project should cost. The costs of quality should also be considered. To read more about the tools of this process, please see earlier postings on TAPUniversity’s blog: PMP Exam – Cost Estimating Tools and Techniques (posted February 4, 2009), PMP Exam – PERT Formula (posted February 6, 2009) which is a weighted three-point estimating formula; and Reserve Analysis (posted February 11, 2009).

The major outputs of Estimate Costs are Activity Cost Estimates and Basis of Estimates. The Activity Cost Estimates are the actual estimates of expenses, and the Basis of Estimates is the supporting detail, such as the assumptions used for a particular estimate.

Reserve Analysis

Several processes found in the PMBOK® listReserve Analysis as a technique . It is also referred to as a “contingency reserve” or “buffer.” The concept is quite simple—we know to expect the unexpected, so we plan for it. Applicable to both time and cost, it is the technique of adding some extra time to complete activities and extra funds to the budget. Although we may know how long our project activities should take, we also know that it is likely that there will be at least some minor setbacks—a key person is sick, weather delays a shipment, etc. Similarly, although we may know how much things should cost, we can easily find ourselves dealing with unexpected costs. By planning upfront for a little extra time and/or funds, we have a safety net when things do not go as hoped. Adding these buffers is one of the principles of the Critical Chain Method. There is not a set way to determine how much of a buffer to add—some may simply add a couple days to each activity or systematically add a certain percentage to the budget. The nature of the project relates to how large of a safety net to spread. A routine project should not need as much of a buffer as will a critical project in unchartered waters. Do you perform reserve analysis? If so, how do you choose how much time or funds to add?

PMP Exam – Cost Estimating Tools and Techniques

So, how much is all this going to cost me? Project Managers must routinely obtain estimates of project and activity costs. The Cost Estimating process (a process in the PMBOK®’s cost knowledge area and planning process group) deals with the task of obtaining reliable estimates for project costs. The Cost Estimating process has three tools and techniques that are specifically meant to obtain cost estimates—Analogous Estimating, Bottom-up Estimating, and Parametric Estimating.

Here are some example of these techniques. The Estemitte family is planning their annual vacation. Mr. Estemitte says that last year’s vacation cost $2,300, so this one should cost about the same. This is an example of Analogous Estimating. Notice that this was a very quick way to obtain a cost estimate and that it may not be highly accurate. If Mrs. Estemitte replies that the cost of travel has increased substantially since last year, and they would obtain a more accurate estimate if they used the vacation expenses of someone who has travelled recently, she is calling into question her husband’s Expert Judgment. Expert Judgment (for example, knowing what vacation or other project to use as a comparison) is critical in order to obtain a cost estimate that has the degree of accuracy needed to be useful.

Mrs. Estemitte breaks down the vacation expenses and obtains costs for lodging, car rental, meals, entertaintainment, souvenirs, and the pet sitter. She totals all these costs at $3,500. This is called bottom-up estimating. Notice that the more detail she uses to break down the vacation activities, the more accurate her estimate is likely to be. Also, it is likely to be more accurate than Analogous Estimating.

The Estemitte family has decided to go to a local all-inclusive resort, which charges $500 (taxes included)/day per family. Travel and other expenses will be miniscule. They want to have 5 days of vacation, so they calculate that the resort will cost about $2,500. This is an example of Parametric Estimating. The cost per unit is multiplied by the quantity of work. Other examples of units of work could be line of code in programming and miles of highway in constuction.