The budgeting process
In the previous modules, we discussed about;
- Requirements collection
- Scope definition
- Decomposing the scope into a Work Breakdown Structure (WBS)
- Decomposing the work packages into activities
- Estimating the activity costs
While performing the activities, there is no guarantee that things will happen as planned and it can incur additional cost and time at the activity level. Hence, it is advisable to add some cost buffers at the activity level, which are formally called as ‘Activity contingency reserve’ to take care of the actual contingencies that may arise during the actual execution of those activities.
During project execution, whether to use the activity contingency reserves or not is decided by the Project manager.
An aggregation of the activity cost estimates within a work package provide the Work package cost estimates.
Since all estimates are approximations, during actual execution, things can go wrong at the work package level as well. To take care of such contingencies, cost buffers are added at the work package level, and they are known as ‘Work package contingency reserve’.
Control account of the work package = Work package cost estimate + Work package contingency reserve
Aggregation of control accounts of all the work packages of the project provides the ‘Cost Baseline’ of the project.
Whether to use the Work package contingency reserve or not is at the sole discretion of the Project Manager / Cost Controller.
‘Management reserves’ are added to the project’s cost baseline to take care of the project level risks.
Whether to use the management reserves or not is with the Senior management.
Project Cost Baseline
The table above shows the month wise cost baseline of a project, which becomes the basis for monitoring and controlling the planned Vs actual cost of a project month wise.
- Can the project manager decide whether to use the management serve or not?
- What is funding limit reconciliation?
- Do the funding requirements of the project include management reserves as well?
- Do the Control account include work package contingency reserves as well?