Project Cost Management: Cost Baseline vs Budget for PMP Exam

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.

recommended PMP resourcesAdditional FREE PMP® resources: 47+ Commonly Confused Term Pairs with detailed explanations. If you found this article useful, you may wish to reference other Commonly Confused Term articles.

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Edward Chung

Edward Chung aspires to become a full-stack web developer and project manager. In the quest to become a more competent professional, Edward studied for and passed the PMP Certification, ITIL v3 Foundation Certification, PMI-ACP Certification and Zend PHP Certification. Edward shares his certification experience and resources here in the hope of helping others who are pursuing these certification exams to achieve exam success.

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6 Responses

  1. kalpesh Patil says:

    I am really grateful to Edward for this easy concept put in short and simple way.
    simply awesome…all doubts cleared for cost baseline and budget.
    thanks for sharing.

  2. Padma says:

    Content is useful. Would like to get tips on PMP 6th edition . Anything on that?

  3. Marion Albuquerque says:

    This is great, really easy to understand. Thanks very much for sharing!