Mastering Cost Control: How to Use a Baseline Budget to Manage Project Expenses

One of the major challenges of starting a project is understanding how to control costs over time. Properly determining and setting a baseline budget will help you better control costs and understand how to maximize your budget throughout the project. Additionally, establishing a baseline budget helps stakeholders maintain a balance between their expectations for the end product and the finances they realistically need in order to complete the project satisfactorily.

The vital difference between cost budget and cost baseline

Professional project managers likely know the difference between the two, as it is a necessary concept to learn for PMP certification. Think of your project cost budget as the total amount of money estimated to deliver the project, including contingency funds for known and unknown risk mitigation. The cost baseline is a time-phased plan for spending the project cost budget, which is used to build in predictability into budget spending and processes for when 

• A project cost budget is the estimated total of all costs for a project, including contingency costs and management reserves. The formula for calculating project cost budget is: Project Cost Estimates + Contingency Reserves + Management Reserves = Cost Budget
• The cost baseline is the approved time-phased spending plan for the project and usually includes contingency reserves. The calculation for cost baseline is: Project Cost Estimates + Contingency Reserves = Cost Baseline

An effective project budget must encompass all the cost elements that can be monitored as the project progresses. Typically, the areas to consider include:

• Project scope: Defining the purpose and deliverables for the project, as well as projected goals, is key to understanding the work you’re about to undertake 
• Project resources: Even if a task only involves an individual making a phone call, you must budget for the person’s time and the resources allocated to that particular individual. Likewise, all resources and materials needed for the project, no matter how trivial, must be considered
• Project schedule: The schedule is much more than a prediction of duration for your project. It is the detailed plan for how you will accomplish your goals, and ties to the resources you’ll require for success.

When a project manager takes the project budget and allocates it over time, it creates a time-phased baseline budget. It is best practice to break project budgets into phases to enable PMs to better track budget vs actual costs through the project’s life. Rather than tracking to a single budget number, the PM creates smaller, measurable budget increments across the project.

Tracking Direct and Indirect Costs in a Baseline Budget

As a project plan progresses, the project manager will compare incurred costs to projected costs. Understanding budget to actual (BvA) is a key performance indicator for project health and keeps everyone from the project manager to key stakeholders informed on spend. 

Your baseline budget must contain a list of direct costs, indirect costs, contingencies, risks, and profits. While stakeholders or executives often dictate contingencies, risks, and profits, the project manager or program manager is typically responsible for estimating direct and indirect project costs.

Understanding Direct and Indirect Costs 

When focusing on direct costs, include the cost of direct labor and the subcontracted costs for all your project tasks. The calculation for direct cost will vary by organization, but is typically a sum of direct labor costs and direct materials costs.

Thus, the baseline budget must also contain costs for materials based on a market assessment or prices asked by suppliers. The costs of the equipment need to be worked out separately. It may be necessary to consider the purchase or lease cost of equipment and the period and tasks for which they are required during the project execution. Depending on your cost analysis, it may be more efficient to buy a piece of equipment rather than rent it.

Indirect costs may include overhead costs for offices and staff that may not be directly attributed to any particular task during a project. They can be considered on-hand resources and might include HR, marketing, and admin. The total costs for communication, travelling, stationery, security, and other related things fall under indirect costs. Some baseline budgets may also factor in taxes and municipal charges as indirect costs.

When to Update a Baseline Budget

In an ideal world, new baselines should be added when there is a change in project scope. There are a couple of other reasons that a project manager might update the baseline:

1. If the organization asks for a re-estimation (which can also be referred to as re-baseline) of all projects in the portfolio or program for a company’s corporate budgeting purposes. In this situation, the finance department will request the most up-to-date estimates on projects even if the scope has not changed.
2. If an obvious or significant gap in one or more task estimates has been identified. How you define obvious or significant should be measured in relation to the project itself. This type of change will likely require communication with stakeholders to set expectations and potentially recast staffing to address the issue.

In the event that the baseline may actually change, it is always important to research, document, and understand the reasons for the change. It is always best practice to post any baseline changes in the project status comments. The changes themselves should be revised and approved by a Change Control Board (CCB) before altering the baseline.

Benefits of Sticking to a Detailed Baseline Budget

• Sticking to the budget stimulates creativity and focus. When members of a project team think resources are near unlimited, they unconsciously tend to throw resources at problems rather than facing them head-on and finding creative solutions.
• A detailed baseline budget makes it easier for a project manager to evaluate the progress of the project continuously throughout its life cycle. It provides telling information, which a project manager can use to make critical decisions like changing the scope of a project or recasting the staffing plan.

So, why is a baseline budget so important?

Even the best project plan can go off track, especially if the project scope is complex or the duration of the project is over weeks, months, or even years. With a baseline budget for a project and a baseline schedule to support it, project managers have the required reference points to measure and analyze project health to better stay on track.

Talk to Prism PPM 

Ready to see Prism PPM’s solutions for financial tracking and baseline budgets?  Book time with us to discuss your challenges and how we can help you get better results across every project through efficient resource management, better project controls, and reports and dashboards that inform everyone from stakeholders to individual contributors.