Once we are done with Estimate Costs, the next process in the line is Determine Budget. You may ask, what is the difference between an Estimate and a Budget? Check this video as it sets the stage for the topic.
Also, let’s revise where we are to keep things in perspective,
Determine Budget is all about taking the outputs of the Estimate Costs process viz. Activity Cost Estimates and Basis of Estimates as inputs and building the project budget from it. The other inputs to this process are same as Estimate Costs process.
Tools and Techniques
Rolling up the estimates of all activities upto the control account level is known as Cost Aggregation. This will help in determining how much each Control Account or Work Package(s) is going to cost.
Funding Limit Reconciliation
‘Funding Limit’ has a pretty straightforward meaning. The problem comes with the usage of word ‘Reconciliation’ here as it may confuse some. Reconciliation means,
- the restoration of friendly relations
- the reestablishing of cordial relations
- getting two things to correspond
- the action of making one view or belief compatible with another
No project has unlimited money to spend. As a project manager, you need to ensure that the project is delivered within the amount that the company is willing to spend. So reconciliation here refers to making the company’s view of funding limit on the project compatible with the project manager
What would happen if the project goes beyond the funding limit? You would then go and speak to the project sponsor with the possible options. Can you cut down the scope? Can the funding limit be increased?
Not all projects are directly funded by internal sponsors. It is a possibility that you need to go to an external organization and seek funding for your project. This external organization is obviously not donating money for your project so they might have some requirements of their own in return. These requirements vary based on the kind of relationship this external organization has with your project.
The external organization can simply be the sponsor of your project, for example – the government. But it is also possible that the external organization is investing money and seeking money in return via profits or shareholding.
Other Tools and Techniques
The other tools used in the process are Reserve Analysis and Expert Judgment
Cost baseline is a snapshot of the planned project budget. The actual project performance is compared against the baseline. Cost baseline is similar to Scope and Schedule baselines where the whole idea is to measure in the monitoring and controlling processes – how you are doing vs what you planned
Project Funding Requirements
How helpful is a single number for the overall project budget? A plan on how and when how much of it will be spent is absolutely required. These plans are documented in the project funding requirements. Based on this the sponsor may decide to allocate funds for your project at several intervals / project phases.
Also, based on the project funding requirements you will be able to ensure your project has money when its needed and have enough to cover risks i.e. contingency and management reserves. Note that,
Project Funding Requirements = Cost Baseline (includes Contingency Reserve) + Management Reserve
Note that the Project Funding Requirements is also known as Cost Budget in certain texts
Check more articles on Cost Management