cost baseline

Warning: Undefined array key "titleWrapper" in /home3/pmstutdp/public_html/wp-content/plugins/seo-by-rank-math/includes/modules/schema/blocks/toc/class-block-toc.php on line 103

You must establish a cost baseline before developing a project budget. This cost baseline assists the project manager in comparing expected and actual expenses and developing the budget. 

The cost baseline is one of three project performance baselines. The other two are the “schedule baseline” and “scope baseline.”

A cost baseline is also known as a cost-performance baseline in some cases.

This article will cover the cost baseline in depth.

What is a Cost Baseline in Project Management?

Project cost baseline graph

The project cost baseline is the approved cost of the project, which includes all estimated costs for resources, materials, and activities. It is a reference point for measuring and controlling project performance, ensuring that expenditures remain within the planned cost throughout the project’s lifecycle.

Project managers cannot change the cost baseline. They need to process a change request. Upon approval of a change request, they can change the cost baseline.

A project cost baseline forecasts a project’s cost over a given period. The project budget is divided according to the progress of the project.

On a graph, the cost baseline forms an S-curve. This shape tells us:

  1. Cost expense in the planning phase is low.
  2. Cost expense is the maximum in the execution phase.
  3. Costs expense again low at the end.

A cost baseline is a comprehensive estimate of the project’s costs. It takes into account the total cost of all project operations as well as the contingency reserve. The project budget includes the cost baseline as well as the management reserve. Contingency reserves and management reserves are used to handle known and unknown risks.

The project is divided into a work breakdown structure, with the work package at the lowest level. Project managers estimate the cost of each work package, and the sum of these is known as the project cost estimate. If they add the contingency reserve, it becomes the cost baseline. A cost baseline compares actual costs to predicted costs to demonstrate variation.

A cost baseline is an approved project cost and includes the cost of wages, materials, equipment, and other direct and indirect costs. It is the total cost of the project. You get the project budget by adding the management reserve to the cost baseline. 

A cost baseline compares actual spending to budgeted spending. Creating a cost baseline is the first step in analyzing project spending

Component of a Project Cost Baseline

A project cost baseline includes the following:

Scope

To establish a project baseline, you must define the project scope. The scope statement, project objectives, and deliverables are used to create the scope. Afterward, you will break the project work into a work breakdown structure and work packages.

Project Schedule

The next step is creating a project timeline, milestones, and a final deadline. A Gantt chart is a good tool because it can be easily modified to meet changing deadlines.

Estimate how long each task will take and allocate resources.

Resources

Every project requires resources, including man, machine, and material. Employees, contractors, subcontractors, equipment, consumables, etc., are examples of resources. I have participated in calculating the project’s resources to help determine the project cost. Often, this is known as a “bill of material” or a “bill of quantity.”

Importance of Cost Baseline

In project management, completing the project within the approved budget is vital. Overspending shows that the project is off track, and you will have unsatisfied stakeholders.

The cost baseline compares the actual effort to the cost variance, cost performance index, and expected effort.

A project must have a cost baseline to determine its cost performance and whether you are underspending or overspending.

The cost baseline provides valuable information to stakeholders, such as:

Deciding If the Project is Worth Proceeding

The project stakeholders can compare the expenses with the actual costs spent. This shows them whether the project is on a budget or has deviations. They will proceed if the deviation is within the acceptable limit; otherwise, they can cancel the project to avoid further cost escalation.

I have witnessed canceling several projects due to cost escalation.

Keeping a Project on Budget 

The cost baseline helps analyze overall cost performance by comparing actual spending to expected expenses. This helps project managers know whether they are under or over budget. They can take necessary corrective and preventive actions to ensure the project stays on budget.

Calculating Earned Value

Cost baseline helps in earned value analysis. You can find the earned value and compare the actual performance to the planned performance. You can examine project trends and predict whether or not a project will have cost deviations in the future.

You can examine the performance of anticipated and actual expenses at the activity level.

Assessing Performance

If you know the baseline cost, you can compare this with the actual expense and see whether you are on track. Project management software may have a “traffic light” or similar system to indicate this. This provides a project manager with variance information, which is helpful for forecasting.

Improved Estimating

When project managers create their cost baseline, they estimate the time each task will take and the effort required to complete it. They determine the likely costs and the revenue if they charge for work done.

How is the Cost Baseline Calculated?

The baseline cost is determined by adding the resource’s planned expenses, which include daily work, expected overtime, and per-use charges for every assigned task to the resource. 

Baseline Cost = (Work x Standard Rate) + (Overtime Work x Overtime Rate) + Per Use Cost.

The cost baseline is the total cost of all project activities/resources plus the cost of managing known risks.

Cost Estimate = Sum of Costs for Work Packages

Cost Baseline = Project Cost Estimates + Contingency Reserves

Project Budget = Cost Baseline + Management Reserve

How to Create a Cost Baseline

Before developing a cost baseline, you must first develop a project strategy. Project management software allows you to define activities, apply resources, link dependencies, define milestones, and track progress.

The following can help you develop a robust cost baseline:

Human Resources

Humans are the key project resources, and each has a different cost. Your employees can have a fixed cost, but if you hire outside experts, their costs will be high. Find the human resource requirements for your project.

Time Estimates

Activity duration affects the cost, and the project cost baseline is a time-phased budget. Time estimates help in cost estimation.

Other Resources

Equipment, software, and materials are all included in these expenditures. The material costs can be found using previous project files stored in the organization archive as organizational process assets. You can also float requests for information and get responses from vendors.

Contingency Reserve

Risks are common for all projects, and cost estimates must account for their management costs. You should consider contingencies for any identified risks and add a contingency reserve to manage them.

Project Cost Baseline Vs Project Budget

The cost baseline and the project budget are linked; the cost baseline is a subset of the project budget.

cost baseline vs project budget chart

A cost baseline is part of the project planning process and measures the budget. It is a cost management technique that can track progress throughout the execution process.

The cost baseline is fixed in stone and acts as a project guideline. A project manager can use the cost baseline to evaluate cost performance. The cost baseline is a criterion for evaluating cost performance. The budget is an estimate of the project cost.

Examples of Cost Baseline

Example 1

Let’s consider the PMP Exam preparation as an example to illustrate the concept of the Cost Baseline. 

Tom, a practicing project manager, has determined to get certified through self-study. He has chosen the cheapest online training courses to get the 35 contact hours certificate to qualify for the exam. The budget for getting PMP® Certification is as follows:

PMI Membership Fee: 139 USD

Project Management Training through self-study: 199 USD

PMP® Exam Fee (for PMI Member): 405 USD.

Set aside a budget for miscellaneous items (e.g., transportation, exam prep book, PMBOK® Guide, mock exams, etc.). : 300 USD

PMP® Certification Cost: 1,043 USD, which is the cost estimate for the PMP® Project

Tom has set aside a budget for any identified risks (e.g., being unable to finish preparation on time, extra learning aids, re-exam after a failure, etc.). His contingency reserve is 500 USD.

Tom is also advised to set aside money for unknown risks, which is around 10% of the cost estimate (according to his own decision), i.e., 100 USD (Management Reserve).

Therefore, for the PMP® Certification Project,

Total Cost Baseline = Cost Estimate + Contingency Reserve = 1,043 + 500 = 1,543 USD

Example 2

Take this social media marketing campaign as an example.

A project manager asks a team member to create a social media campaign to coincide with the launch of a new product. They define a project budget, and their goal is to build brand awareness and encourage early product sales.

Therefore, their project baseline could look something like this: 

Scope/Deliverables: 500 direct sales

Schedule: One month 

Cost: 1,000 USD

In this project baseline example, you must first outline all the tasks to improve the company’s conversion rate and achieve the end goal of 500 sales. This would include plans for social media posts for various platforms with exact copy and design briefs. 

They can then map their schedule in a content calendar, including optimized dates and times for each post. Finally, a detailed budget will be created to divide costs across various sectors, e.g., PPC fees for Facebook ads.

Conclusion

The project cost performance is measured against the cost baseline. A project manager cannot make changes to a project without an approved change request. As a project manager, you should keep an eye on the cost baseline performance because if the expense exceeds it, your project will go over budget, and you may need to propose a change.

Fahad Usmani, PMP

I am Mohammad Fahad Usmani, B.E. PMP, PMI-RMP. I have been blogging on project management topics since 2011. To date, thousands of professionals have passed the PMP exam using my resources.