Cost budgeting

Cost budgeting (Determine Budget) is the process of aggregating the estimated costs of individual activities or work packages to establish an authorised cost baseline. It allocates the overall cost estimate to individual work items over time, so that the project's performance can be measured against it.

Inputs, tools and outputs

Steps

1. Estimate cost of each work package.
2. Aggregate upward to control accounts and project total.
3. Add contingency reserve (for identified risks) to get the cost baseline.
4. Add management reserve (for unknown risks) to get the project budget (not part of baseline).
5. Time-phase the budget by schedule: cost per period.
6. Reconcile with the funding limits of the organisation.
7. Approve the cost baseline.

Work package estimates
   -> Control accounts -> Cost baseline (+ contingency)
   -> + Management reserve -> Project budget

Cumulative cost curve

Cost
  |            ___--- Budget
  |        __--
  |    __--    (S-curve)
  +---------------------- time

Importance

• Gives a standard to measure and control cost (earned value).
• Shows when funds are needed.
• Supports approval and funding decisions.

Example: A 10-month web project costs Rs 20 lakh. Budget by month shows heavy spending in months 4-8 during development; a 10% contingency (Rs 2 lakh) is added.