Tuesday, May 27, 2008

The Project Cost Baseline

What do you get when you cross a project budget with a schedule? It's something that gives you an idea of the total budgeted costs of project activities per time period—otherwise known as the project's cost baseline.

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.
But why stop at just one type of curve? You also can plot and display the values of expected cash receipts and actual project costs. Plot these curves next to the cost baseline for comparative purposes.
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.
  1. Draw a chart of activity durations.
  2. Assign a budget to each activity.
  3. Measure the accumulated costs per time period.
  4. Plot cost-per-time data on a graph with duration on the x axis and cost on the y axis.
  5. Connect the dots to see the curve.
The cost baseline for your project is the plan against which you will measure, monitor, and control costs. Use the cumulative cost curve as a graphical representation of the baseline when comparing planned costs to actual costs.

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