A cost baseline, which is an output of the cost budgeting process, is a time-phased budget that is used to measure and monitor cost performance on a project. It is developed by summing the estimated costs by period. The cost baseline takes the form of a cumulative cost curve, or an S-curve.
Why does a project's cost baseline look like a curve? It has to do with the typical spending pattern, or "burn rate," of project funds. A cost baseline usually takes an "S" shape, when plotted on a graph, for the following reasons.
- Costs in the planning or design phase are usually low.
- Once production begins, costs increase quickly relative to the passing of time.
- Costs decrease toward the end of the project during wrap-up and delivery.
Plot expected receipts next to the cost baseline to display a forecast of the project's cash flow. You may have several periods of time during the project where you have significant expenses but have not received payment for that work, especially if you are paid only for deliverables.
If this creates a need for short-term financing to cover bills, you will want to know the likely time frame in which this will occur. Then you will be able to predict the terms for any necessary loans.
Plotting budgeted costs and actual costs side by side enables you to quickly see whether cost performance is good, evaluate the size of cost variances, and easily report cost performance to stakeholders.
Before you can plot planned costs over time, you have to establish the coordinates—that is, what costs should be per time period. If you are using a computerized scheduling tool, simply input the data and generate a cost report by time period. The software will probably create the cost curve for you.
In the absence of computerized tools, you can use a bar-chart of your schedule to establish cumulative costs over time. Follow these steps.
- Draw a chart of activity durations.
- Assign a budget to each activity.
- Measure the accumulated costs per time period.
- Plot cost-per-time data on a graph with duration on the x axis and cost on the y axis.
- Connect the dots to see the curve.