Cost Baseline in Project Management by Tariq Mahmood

Cost Baseline in Project Management 

A cost baseline is the budget that has been approved for the project, broken down into a list of salaries, materials, equipment and more. It’s the sum of the cost estimates for all the tasks on your project schedule. Once you have a cost baseline, you need to add a management reserve, which is a portion of the project budget that’s used as a contingency reserve for management control and unexpected costs.

Importance of Cost Baseline

When it comes to project management, sticking to a project budget is crucial. Overspending indicates that the project is off track, and you will have disgruntled stakeholders. The cost baseline is used to compare the actual effort to the cost variance, cost performance index, and expected effort. Estimate at completion, estimate to complete and to complete performance index are all useful for predicting. If a project manager does have a baseline, they wont be able to evaluate their costs

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

The following considerations in mind when setting cost baselines.

Human Resources

The cost of the project is determined by the resources available. Every team member has distinct abilities and specialties suited for different tasks. The cost of human resources is included in the cost baseline.

Time Estimates

The cost depends on the time taken by activity, and the project cost baseline is a time-phased budget. Time estimates help in cost estimation.

Material Resources

Equipment, software, and materials are all included in these expenditures. Material costs can be estimated using prior project files that have been documented in the project accounting system by project managers. They can also put out requests for information and have the vendors respond.

Contingency Reserve

Risks occur in most projects, and the cost estimate must account for them. You should consider contingencies for any identified risks and add the contingency reserve to manage identified risks