The Importance of a Baseline Budget

The Importance of a Baseline Budget
The Importance of a Baseline Budget

Time and cost management are two essential processes of all projects. Baseline schedule and budget are main project management documents that should be created at early stages and kept updated at throughout the project life cycle. A baseline budget includes a breakdown of all direct and indirect costs of a project.

Baseline Budget



A baseline budget may include a cost breakdown structure, unit price analysis, overhead costs and cash flow. It can be prepared at any detail level based on the project’s size and requirements. Once a detailed baseline schedule is created and approved, cash flow and time phased plans of the baseline budget is created.
While creating a baseline budget, scope of work, work breakdown structure, indirect costs, project duration and risks must be taken into consideration. Labor, material, sub-contractor and machinery costs are grouped under the direct costs. Running costs, insurance, depreciation, administration, security costs, staff salaries are grouped under the indirect costs. In addition to that, management and contingency reserves should be added to the budget in order to manage risks.

Changing the Baseline Budget



Baselines should only be changed when there is a change in scope and/or the organization needs a re-baseline. As the project progresses, project’s scope changes based on the technical requirements or the clients needs. Once the scope changes, cost items should be calculated according to the new conditions.

New material, equipment, sub contractor and running costs may be added to the budget. In the same way, if the scope is reduced, some of the costs are removed from the budget.
During the execution of the project, one or more tasks may have been underestimated or a ‘significant’ difference between the planned and the actual figures may have been identified. In that case the organization and the project management team needs a re-baseline.

Baseline Budget Tracking



After the approval of the baseline budget, it will be retained as target. Budget tracking is calculate and analyze the differences between the planned costs and the actual costs. Earned Value Management (EVM) technique can be used for measuring project cost performance and progress in an objective aspect.

Summary



In project cost management, baseline budget is used as a reference to compare the planned and the actual costs. It offers the organization the opportunity to understand the cost performance of the project. Without the baseline, it will not be possible to take corrective and preventive actions when needed.

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