The cost baseline in project management is a crucial metric because it helps project managers monitor and control the project’s budget and make required changes when necessary.
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What is the Cost Baseline in Project Management?
Project cost management is the most crucial process in your project because it helps estimate, allocate, and control project expenses. Furthermore, it helps predict coming expenses in order to reduce the chances of it going over budget. Before work begins, project costs should be calculated during the planning phase and approved.
The project cost management process provides,
- A framework of cost management
- Develop cost estimates
- Finalize project budget
- Prepare a cost baseline
- Control of project cost
As a project manager, you must manage your project time and money efficiently to ensure the project’s success. So, the cost baseline will help with the letter by establishing the project budget and overall project’s financial requirements.
According to the PMBOK (project management body of knowledge), a cost baseline is the approved version of the time-phased project budget that is used as a basis for comparison to the actual cost.
A cost baseline is the approved project budget. It includes all the estimated costs of the project activities, resources, salaries, equipment, and more. That is basic for reporting and analyzing the project performance and variance.
A project cost baseline should comply with the project’s triple constraints, including time, quality, and scope.
According to that, the project cost baseline should be realistic and accurate.
What Are the Included in a Project Cost Baseline?
The project cost baseline is an approved spending plan during the project life cycle, including initiating, planning, executing, monitoring, controlling, and closing. It includes every project activity, task, and required resources that are needed for a project.
The following are the key components that should be included in the cost baseline.
- Direct Cost
Direct cost means expenses directly related to the project. That usually includes labor, equipment, or materials.
- Indirect Cost
Indirect cost means expenses indirectly related to the project. However, these expenses are necessary for the overall execution of the project. That usually includes rent, utilities, administrative costs, etc.
- Contingency Reserves
This component includes any contingency reserve funds to help deal with potential risks you may identify during a risk analysis. These issues will negatively affect the project schedule, quality, and budget.
How is a Cost Baseline Created in Project Management?
Creating a cost baseline begins with estimating the overall project costs. That typically includes the project tasks and resources needed to accomplish the project’s acceptable outcomes. Also, this is the initial estimated budget for the project. When creating a project cost baseline, the project manager should follow these processes to ensure project success. Those are,
- Estimate Overall Project Costs
When you estimate project costs, it should be associated with the project. That typically includes the overall cost of the project, for example, labor, material or equipment cost, training cost, medical expenses cost, and more.
- Breakdown Cost Elements
By breaking down cost elements, you can gain more accurate cost estimates. For example, if your project resources costs are a significant part of your overall project cost, break it down into categories to gain more accurate costs.
- Determine Resource Requirements
As a project manager, you should determine the required resources, quantity, and duration to complete your project without any issues.
- Assign Cost Estimates
This process typically involves required costs with specific project activities, tasks, or deliverables. It is based on your project resources requirements and their duration.
- Aggregate Cost
Project managers should summarize the estimated project costs from their cost elements to create a comprehensive project budget.
- Validate and Review Cost Baseline
After creating cost estimates, you should review your cost estimates with the project stakeholders.
- Finalize Your Project’s Cost Baseline
After validating and reviewing your project’s cost estimates, you should establish the cost baseline if you get approval from stakeholders.
- Monitor and Control Project Costs
After getting approval for your cost estimates, you can execute your project activities or tasks. During the execution phase, project managers should monitor and control the project cost baseline and make adjustments when necessary. On the other hand, you should compare the actual cost to the cost baseline to ensure project success.
How to Calculate Cost Baseline in Project Management?
The cost baseline in project management is determined by adding the resource’s planned expenses. That typically includes daily work, expected overtime work, and more.
- Baseline Cost = (Work*Standard Rate) + (Overtime Work*Overtime Rate) + Per Use Cost.
- Cost Estimate = Sum of Costs for Work Packages
- Cost Baseline = Project Cost Estimates + Contingency Reserves
- Project Budget = Cost Baseline + Management Reserve
Example for Baseline in Project Management
As a project manager, you planned to launch a social media marketing campaign with your team members. Take this as an example.
As a project manager, you discussed with your team members to create a social media campaign to launch a new product. So, they allotted a project budget, and their goal is to expand brand awareness and encourage early sales of the project.
So, their project baseline could look as follows,
- Scope/Deliverables: 1000 Direct sales
- Schedule: Two months
- Cost: $2,000
According to this project baseline, you must first outline all required project tasks needed to improve the organization’s conversion rate and achieve the end goal of 1000 direct sales. On the other hand, you can map the schedule in a content calendar, including optimized dates and times for each task or activity. Finally, create a detailed budget to divide costs across various sectors in your social media marketing campaign.
Tips and Tricks for Maintaining a Cost Baseline
As a project manager, you should know how to maintain a cost baseline effectively and efficiently. So, the following are some tips and tricks for maintaining a cost baseline.
- Collect Essential Details
As a project manager, you should ensure all the project data to create a project budget. That typically includes labor costs, material costs, and more.
- Use a Budgeting Tool or Software
If you use budgeting tools or software, project managers can track and compare project costs efficiently. Furthermore, it will help them stay on top of their project and stay on budget.
- Track Progress and Project Costs
As a project manager, you should track progress and the cost of your project because it will help project managers stay within budget and identify areas where cost savings can be made.
- Monitor Project Changes
After beginning your project, you should keep track of project changes and adjust your cost baseline accordingly.
- Review and Adjust
As a project manager, if your project’s cost baseline changes, you should continuously review it and adjust accordingly to the current project budget and resources. On the other hand, it will help you stay within the project budget.
Why is Cost Baseline Important in Project Management?
The cost baseline provides crucial information for project managers and other project stakeholders. So, according to that, the following are benefits of cost baseline in project management.
- The cost baseline in project management allows project managers to compare actual expenses to projected expenses at the same point in the project, and it will help keep a project on budget.
- Cost baseline in project management helps project managers evaluate overall project performance, and it will help ensure the project doesn’t go off track.
- Cost baseline in project management helps project managers compare the actual effort to the cost variance, cost performance index, and more. Further, all these are useful for predicting.
- The cost baseline in project management allows stakeholders to judge whether the project is worthy of being carried out.
- The cost baseline in project management helps project managers enhance cost management.
- The cost baseline in project management helps project managers monitor project costs to prevent overspending and protect the company’s financials.
What is the Difference Between a Cost Baseline and a Project Budget?
The cost baseline and project budget are closely related. However, both the cost baseline and project budget are used differently. The cost baseline is the first step in creating a project.
As a project manager, you should collect all the cost estimates for each project task or activity. You should also add a management reserve for unexpected expenses.
Once you have those, you can create a project budget. That typically includes all the funds required to execute your project without any delay.
After beginning your project, the project budget will be used to approve a project cost and keep track of expenses. On the other hand, the project cost baseline can be used to compare the actual costs of the project against the cost estimates. Furthermore, the cost baseline can be used as a metric to measure cost performance throughout the execution process. Read more: Project Metrics
As a project manager, you can use the cost baseline to evaluate cost performance while the project budget shows them how much money they have left over to spend.
What Are the Other Components of a Project Cost Baseline?
The following are other components of the project cost baseline. Those are,
- Project Scope
As a project manager, to establish a project baseline, you must identify and approve the project scope. When creating a project scope, the following document you must use. Those are,
- Scope statement
- A list of project objectives
- Deliverables
- Project Schedule
The project managers should create a timeline with dates, milestones, and final deadlines. They can also use tools like Gantt chart to create project schedules effectively and efficiently.
Conclusion
Project baseline helps project managers keep the project on track and measure various project performance. These include the scope baseline, schedule baseline, and cost baseline. As a project manager, you should have a good sense of handling cost baseline in project management because it helps estimate, allocate, and control project expenses. Furthermore, the project cost baseline helps monitor project costs to prevent overspending and project the company’s financials.
