Estimate Cost versus Determine Budget

Estimate Cost versus Determine Budget

There are two processes within the cost knowledge area and planning process group: Estimate Costs and Determine Budget. Both are required in order to develop the project cost performance baseline.

Cost Estimate

The cost estimates are simply the costs associated with the work packages or activities within the project schedule. Depending on the work package or activity, the cost estimate may be determined using parametric, three-point, or analogous estimating techniques.

It is important for all cost estimates to include any assumptions that were made, where did the estimate originate, who provided the information, level of confidence, etc.

Budget

The budget is built using the cost estimates and the project schedule. The budget provides a view of how much the project is estimated to cost both from a total and a periodic perspective. This budget feeds the cost performance baseline which is then used as critical ingredient in performing earned value analysis and other cost management variance analysis techniques.

The project budget must be in alignment with the organization’s funding limits in order to ensure the funding is available and has been appropriated.

Example

The bathroom remodeling project will include the following cost estimates:

    Demolition - $3,000: Week 1
    Sheet rock - $2,000: Week 2
    Tile floor - $3,500: Week 3
    Fixture installation - $1,500: Week 4
    Painting - $800: Week 4

Therefore the total budget is $10,800:

    Week 1: $3,000
    Week 2: $2,000
    Week 3: $3,500
    Week 4: $2,300

Summary

Both cost estimates and budget are needed in order to determine the cost performance baseline and the project funding requirements.

Cost estimates are the estimated costs for each work package or activity, whereas the budget allocates the costs over the life of the project to determine the periodic and total funding requirements.

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Performance Measurement Baseline (PMB). 
Integrated scope, schedule, and cost baselines used for comparison to manage, measure, and control project execution.

Project Budget = Project Cost Estimates + Contingency Reserves + Management Reserves

Project Budget, which is a lump-sum amount for the entire project.

Project Cost Baseline(aggregated) = Project Cost Estimates + Contingency Reserves

Thus Project Budget = Project Cost Baseline(aggregated) + Management Reserves

Project Cost Baseline is not a single big lump-sum amount. It's a time-phased budget (or costs by calendar period) and usually represented in the form of an S-curve.

In short, Contingency Reserves are included in Project Cost Baseline, but Management Reserves are not. If you add Management Reserves to aggregated Project Cost Baseline, you get the Project Budget.


As a side note, Project Cost Baseline is not a single big lump-sum amount. It's a time-phased budget (or costs by calendar period) and usually represented in the form of an S-curve. If you aggregate the costs by calendar period, and add the Management Reserves to it, you'll get the Project Budget, which is a lump-sum amount for the entire project.

Please note that management reserve is not part of the project cost baseline. This is because cost baseline constitutes of funds that are authorized to be spent for planned activities of the project, and management reserves are only for activities that come up as a result of unplanned changes to project scope or cost.

Hence, management reserve can be part of overall budget. They are not part of Earned Value Management calculations  and the project manager would need to get approval to utilize the management reserve.