For PMP Certification purposes, you should know that when building a budget, you need expert judgment in the form of team members and perhaps even finance folks, depending on the size and complexity of the budget. The main technique is cost aggregation. This will be coupled with reserve analysis and funding limit reconciliation. In some industries, you can use historical relationships to validate the budget curve.
Cost aggregation
Cost aggregation is simply summing the costs for each work package to the control account up to the project level. You can aggregate this information by time period to see the scheduled spending per time period. Here, you can see activities and costs for the playground installation for a childcare center.
The second row from the bottom shows the weekly cost, and the bottom row shows the aggregation of costs so you can see a running total of planned expenditures.
| Estimate | Week 1 | Week 2 | Week 3 | Week 4 | |
|---|---|---|---|---|---|
| Grade site | $2,500 | $2,500 | |||
| Pour pad | $2,500 | $2,500 | |||
| Install swings | $1,500 | $1,500 | |||
| Install slide | $1,500 | $1,500 | |||
| Install teeter-totter | $1,200 | $1,200 | |||
| Lay sod | $1,500 | $1,500 | |||
| Plant trees | $600 | $600 | |||
| Weekly cost | $2,500 | $2,500 | $4,200 | $2,100 | |
| Cumulative cost | $2,500 | $5,000 | $9,200 | $11,300 |
Reserve analysis for determining the budget
Reserve analysis, as used in developing a budget, takes into consideration both contingency reserve and management reserve. This can be a tricky distinction, and not everyone agrees on the exact definition. The PMBOK Guide defines reserve and contingency reserve, but not management reserve. After the following definitions, you will see some examples.
Contingency reserve. Budget within the cost baseline or the performance measurement baseline that is allocated for identified risks that are accepted and for which contingent or mitigating responses are developed.
Reserve. A provision in the project management plan to mitigate cost and/or schedule risk. Often used with a modifier (for example, management reserve, contingency reserve) to provide further detail on what types of risk are meant to be mitigated.
Contingency reserve concerns risk identified in the risk register. It is used to reduce risk on the project by providing funds for specific deliverables, phases of the lifecycle, or the project as a whole. Contingency reserve is used to ensure that the project doesn’t overrun the available funding. Contingency funds are included in the cost baseline and the funding requirements.
Using a childcare center example, assume that you set aside 10% of the budget for risk management. A week before the playground equipment is supposed to be installed, the playground equipment contractor calls to announce a delay in getting the slide delivered. The project manager could use contingency reserve to either find another supplier, or perhaps expedite shipping and delivery, or maybe pay overtime to get it installed faster.
Management reserve is for unplanned, in-scope work. For example, say the plumbing contractor at the childcare center put in 20 feet of PVC pipe, and then the carpenter put up the drywall and painted everything only to discover a hairline crack in the pipe that was leaking. The plumber needs to take out the drywall, replace the pipe, and pay to have the drywall replaced and possibly repainted.
This is in-scope work, but it was definitely not planned. Management reserve would be used to pay for that. Management reserve is not part of the baseline, but it is part of the funding requirements.
Another aspect of reserve analysis is deciding how to allocate it. Because installing a playground is a relatively low-risk endeavor, without many unknowns, you would probably put in only 5–10% contingency for unexpected costs. You might want to apply it evenly throughout the project, or assign 10% in the concept phase, 20% in the planning phase, 60% in the construction phase, and the remaining 10% at walk-through.
Fund limit reconciliation
When you first lay your cost estimates over time and aggregate the funds by time period, you should compare the results with any funding limitations identified in the scope statement or elsewhere.
This might require you to reschedule the work to meet the funding limitations. Usually, it necessitates extending the schedule to account for limited funding although sometimes funding must be spent by a certain date lest it be lost – and this might call for schedule acceleration.
Historical relationships
A good way to check the validity of your budget is to compare it with any historic data or industry data that show cost relationships. For example, organizations that do similar projects and use a defined lifecycle can tell you what percent of the budget should be spent in each lifecycle phase. You can compare the historic information with your project lifecycle to make sure that they’re aligned.
Note: You should be able to explain significant differences.