Project Cost Management: Cost Baseline vs Budget for PMP Exam
In Project Cost Management, project managers will have to deal with Cost Baseline and Cost Budget. However, these two terms are easily confused in everyday language. In the PMBOK® Guide, Cost Budget and Cost Baseline are different concepts that need to be distinguished clearly. This post will expound on the similarities and differences of Cost Baseline and Budget and what Aspirants would need to know for the exam.
Cost Baseline vs Budget
- Cost Baseline: Cost Baseline is the authorized time-phased spending plan for the project on which the project cost performance is to be measured against. As the Cost Baseline is baselined and managed under configuration management, changes to the Cost Baseline must undergo proper change management processes.
- The Cost Baseline includes all the project activities/resources costs and the money set aside to respond to risks identified (i.e. known unknowns) over time and it is usually represented as an S-curve
- Cost Baseline = Project Cost Estimates + Contingency Reserves
- Cost Budget: the allowable deviations requested based on customer expectations
- The Cost Budget is the estimate of total amount of money required for carrying out the Project, including money set aside for identified and unidentified risks (i.e. unknown unknowns)
- The Cost Budget can be thought of as the Cost Baseline over time plus the Management Reserves
- Cost Budget = Project Cost Estimates + Contingency Reserves + Management Reserves
Cost Baseline vs Budget for PMP® Exam Illustrated
Let’s take the project of PMP® Exam study and preparation as an example to illustrate the concept of Cost Baseline vs Budget.
Paul, a promising project manager, has determined to get certified through self-study and you have chosen one of the cheapest online training course to get the 35 Contact Hours Certificate in order to be eligible for the exam, you budget for getting PMP® Certification is as follow:
- PMI Membership Fee: US$139
- Project Management Training through self-study: US$199
- PMP® Exam Fee (for PMI Member): US$405
- You may also need to set aside budget for miscellaneous items (e.g. transportation, exam Prep book, PMBOK® Guide, mock exams etc.): US$300
- PMP® Certification Cost: US$1043 which is the cost estimate for the PMP® Project
Paul will also need to set aside budget for any identified risks (e.g. unable to finish preparation on time — postpone the exam, need extra learning aids as the exam is unexpected difficult, re-exam after a fail, etc.) which is expected to be US$500 (Contingency Reserve).
Paul is also advised (according to PMBOK® Guide) to set aside money for any unknown unknowns which is set at around 10% of the Cost Estimate at this time (according to his own decision), i.e. US$100 (Management Reserve) .
Therefore, for the PMP® Certification Project,
- Total Cost Baseline = Cost Estimate + Contingency Reserve = US$1043 + US$500 = US$1543
- Total Cost Budget = Cost Baseline + Management Reserve = US$1043 + US$500 + US$100 = US$1643
Summary: Cost Baseline vs Budget
Aspirants would need to remember the simplified formulas in order to understand the differences between Cost Baseline and Budget:
- Cost Budget = Cost Baseline + Management Reserve
- Cost Baseline = Cost Estimate + Contingency Reserve
- Cost Estimate = sum of costs for work packages/activities
In fact, for Project Cost Management, there are a number of terms that Aspirants need to understand:
- Cost Estimate: the aggregated costs for the work packages or activities of the project without making allowances for risks
- Management Reserves: management reserves are money added to the project overall budget by the senior management for uncertain events that are not even thought of (also known as “unknown unknowns”, i.e. risks not shown in the risk register)
- Contingency Reserves: contingency reserves are money added to the project cost estimates by the project manager for uncertain events / risks that might happen (also known as “known unknowns”)
- detailed explanation of Management Reserves and Contingency Reserves
Hope this article can illustrate the differences between Cost Baseline vs Budget well.