What is Cost Baseline in Project Management

Tabel of the content

• Cost Baseline in Project Management
• How is the Cost Baseline in Project Management Calculated?
• Project Budget and Cost Baseline – What is the Difference?
• Setting up a Cost Baseline
• Importance of Cost Baseline
• Conclusion

Managing projects and finalising or preparing a budget for the project is challenging. Project management requires handling and taking care of many responsibilities starting with resource management, collaboration, planning a budget, and analysing the actual spending on the project. This is where Cost Baseline in Project Management comes into the picture.

Developing a cost baseline for the project helps to compare the actual spending or cost of the project to projected spending. In short, it is the budget that has been approved for the completion of the project. The budget is usually broken down and adjusted over a period of time.

One of the crucial factors that are key to the successful completion of a project is adequate money. Project cost management means keeping some additional funds handy in case of an emergency. Hence, this makes budgeting an integral part of handling any project. The cost baseline is a major outcome of the budgeting process. This article deconstructs the importance of cost baseline, its impact on managing projects, and analysing the project performance.

Cost Baseline in Project Management

The Cost Baseline in Project Management is an integral part of project management that predicts the total amount of money predicted for the completion of a project. The cost baseline predicts the project's overall cost through a particular time period. These are alternatively also known as time-phased budgets as the overall budget is linked with time. The cost estimation is represented by the S-curve showing the total cost that would be used over time.

The baseline provides a comparison between the estimated budget to the actual cost. There are a few factors which are involved and include multiple aspects of a project:

• Scope of the project – The foremost aspect to be considered involves the project's purpose. It also defines the expected deliverables and statement of the work.
• Schedule of the project – This takes into account the overall duration for the completion of the project. It also involves all the phases or work that need to be completed within a specific time period for the project.
• Resources for the project – Planning and completing a project requires a number of resources—people, raw materials, vendors, logistics, suppliers, collaborators etc. Resources usually include people working closely on the project and any asset or equipment necessary for its completion. It also involves third-party contractors or vendors.

The PMP certification course provides a step-by-step understanding of how to create a budget. When the estimated budget is approved to begin the project, it becomes a cost baseline.

How is the Cost Baseline in Project Management Calculated?

The calculation of the cost baseline for a project requires accurate and thorough calculations. The baseline cost is determined by adding the planned expenses for the project, including the resources. This includes many aspects of expenses like daily work, expected overtime, charge for every assigned task, cost of any third party service, cost of operations etc.

However, the simplest way to calculate the cost baseline is

Baseline Cost = (Work X Standard Rate) + (Overtime Work X Overtime Rate) + Per Use Cost

Hence, the cost baseline is the total cost involved in project activities/resources and managing known risks.

Project Budget = Cost Baseline + Management Reserve

Where the cost baseline involves the project cost estimates along with contingency reserves.

Project Budget and Cost Baseline – What is the Difference?

These terms are often interchangeably used because they are closely related. Although they sound similar, there is a difference. Project budget and cost baseline both involve analysing how much money goes into the completion of a project.

However, the major difference is that the project budget is the initial estimation of expenditure required for the project. The cost baseline is the approved version of the projected costs. This means that the cost baseline is fixed; hence, the project would start based on the allocations. With the help of a cost baseline, it becomes easy for project managers to compare spending in a real-life project to the projections.

Setting up a Cost Baseline

The PMP Cost baseline is set up considering numerous factors. As a project manager, it is required to set up a budget for the project in advance. The PMP Training or course helps professionals understand the nitty-gritty of project management and how a budget is set. There are many activities, and the budget needs to be planned separately for all. Break down the planned activities' costs and collectively compile them to create a cost baseline. Here are a few things that need to be considered:

Human Resources

The overall cost depends on expenses that go into aligning and allocating the resources for the project. A project needs a team, and each member contributes through their skills. Each team allocated for a project comes with a set of skills. Hence, estimating spending on resources is primarily important for executing a project and ensuring timely completion.

Materials and Resources

A project requires various resources and materials for successful completion. This includes equipment, third-party suppliers, software, etc., which accounts for a significant part of the expenditure. It is crucial that the project manager consider expenditures in previous projects to create a budget. Negotiating and estimating material costs based on previous projects is helpful.

Time Estimates

The time frame required for the completion of the project is another factor to consider while preparing a budget. The billable hours against each person or resource that will work on the project help calculate the project budget.

Contingency Reserve

Certain risks must be considered while budgeting for a project. Always identify any potential risks and add contingency reserve to the overall budget. This helps cover unexpected or unseen expenses and offers a window to cope with overboard expenditures.

Importance of Cost Baseline

The PMP cost baseline is significant and helps manage projects effectively. It provides an idea of the overall expenses required to complete a project. Here are some reasons the cost baseline is important:

• Every project has a purpose and end goal. However, it does require a budget to start and continue the project until completion. Evaluating the initial baseline helps stakeholders or investors analyse if the project is worth it.
• Without a budget, it is difficult to keep track of the expenditure and the allocation of funds. The cost baseline compares actual expenses to projected expenses. With budget planning, it reduces the chances of the amount getting exceeded.
• The budget is another indicator or way to analyse and evaluate the overall performance. The metrics ensure the project stays on track.

Conclusion

A cost baseline is a significant part of budgeting for a project. It is crucial to estimate the budget for a project according to a particular period of time. It prevents companies from spending on unnecessary expenses. A cost baseline is an approved project budget prepared to take into consideration resources, time estimates, materials etc. Learn more about the PMP training and certification course at StarAgile Consulting. The certification course helps grasp concepts while scaling up knowledge in budget and cost baseline.

Frequently Asked Questions

What is the meaning of cost baseline in Project Management?

The cost baseline is the estimated or predicted budget for a project's completion over time. As it is linked to a specific time period, it is also known as a time-phased budget.

How can I prepare for unidentified expenses when preparing a project budget?

There are unexpected expenses that might arise in a project. It is crucial to measure the risks and identify the potential impact. Once the risk is identified, a contingency reserve is added to the overall project budget or cost baseline to take care of the expenses.

What are two important aspects of projects incorporated in a cost baseline?

Two important aspects of the project incorporated in a cost baseline include:

· Scope of the project – This is the first aspect that is considered and involves the project's purpose. It also defines the expected deliverables and statement of the work.

· Resources for the project - Resources usually include people working closely on the project and any asset or equipment necessary for the completion. It also involves third-party contractors or vendors.

How can I become a pro at estimating cost baseline?

The PMP Training or certification course is designed for aspiring project managers. The course provides step-by-step training for every aspect of the budget, and hence, also in preparing cost baseline.

What are the important factors involved in setting a cost baseline?

·   Human Resources

·   Material and resources

·   Contingency reserves

·   Time estimates