Determine Budget

00:01 Hello and welcome.

00:03 This module covers the determined budget process from the PMBOK guide. The exam importance is very high because the project budget becomes our cost baseline for the project and usually our stakeholders always want that question answered.

00:20 How well are you doing in terms of cost? The difficulty is rated as medium because most project managers do cost management and budget management very well.

00:31 And the memorization is generally pretty low because you've seen most of these concepts before, not too much new to come.

00:41 The determined budget process is one of four processes in the project cost management knowledge area.

00:49 It's the third Planning process after plan cost management, which gives us our cost management plan.

00:57 And provides the the cost management plan provides advice on how we estimate our costs.

01:04 The determined budget actually combines outputs from the estimate cost process and also the developed schedule process from project time management to give us our project budget.

01:18 And of course, once we have our project budget, we can then control costs by using that as a baseline and comparing actual cost performance to what we think should happen on the project.

01:31 The particular domain task that this process helps us understand better is Planning Task 2, which says develop the cost management plan based on the project scope, schedule resources, approve project charter and other information using estimating techniques in order to manage project costs.

01:54 And in fact, this single domain task covers all three of the cost management planning processes.

02:05 The key theme of this process is to take the individual cost estimates and also the project schedule combined them and develop the project budget.

02:20 The potential inputs that we could use, first and foremost, obviously will want our cost management plan.

02:29 It's our guide.

02:31 It shows us how we're going to develop our budget, what tools and techniques we are going to use, what software we are going to use, the level of certainty that's acceptable. The metrics will use it's all there in our cost management plan.

02:46 So we will want that.

02:49 We'll also want our scope baseline and remember the scope baseline contains those three elements the scope statement, the work breakdown structure and the work breakdown structure dictionary.

03:03 We'll want individual cost estimates and the associated documentation, the basis of estimates, both outputs from the estimate cost process.

03:17 Well, also want, and most importantly, need the project schedule for without it.

03:22 We cannot turn our cost estimates into a project budget because the project budget is simply costs over time.

03:31 So we need the time component and the project schedule is an output of the developed schedule process from the Project Time Management Knowledge Area. We may also want our resource calendars because our resource calendars give us constraints about when resources are available and when the costs will be incurred.

03:55 One other input that we may want are agreements that we've signed, contracts that we've signed, particularly because these agreements or contracts may be very clear about when costs will be incurred and when payments will be made.

04:13 Obviously, when we begin to budget for when costs will go out of our organization and when we'll get costs coming in, some contracts specify monthly payments.

04:24 Others specify milestone payments.

04:26 Others specify money upfront or money withheld at the end.

04:31 We need all of these factors in order to do an accurate project budget. So go looking for any agreements and read them very carefully in relation to when the money's coming in and when the money's going out. The final input that we will find useful will be organizational process assets, and these will be parts of our project management methodology that relates specifically to the development of the budget.

04:59 They may define the format we use, the accuracy of the content or even the software we have to use.

05:07 So once we have those inputs, we can select from the following tools and techniques those that are most useful to us and most appropriate.

05:16 The first being cost aggregation.

05:20 Now, call segregation in this sense means taking the costs and aggregating them in each time period in which they are incurred. So you may aggregate your costs weekly or monthly or quarterly.

05:38 So we're not adding them up on an activity basis when they're aggregating and adding them up on a time basis, and we've got an example coming up in a moment to show you.

05:49 We may also choose to use reserves analysis in order to try and build up either a contingency reserve or a management reserve.

05:59 Now, a contingency reserve is a specific sum allocated to identified uncertainty on your project. It can be built up in many ways, ranging from historical information that you generally under.

06:16 Estimate your budgets through to actual individual analysis of uncertainty relating to the rate of inflation on all of the materials that you plan to procure and add all of those up, and then they become your contingency reserve. You can also use quantitative risk analysis to build up a quantitative risk contingency reserve.

06:39 There's many ways to build up a contingency reserve, but what they all have in common is they're all used legitimate, transparent, defensible techniques for developing a contingency reserve as opposed to padding of an estimate.

06:55 Now, padding is considered to be unethical, and you should never pad an estimate. Padding means simply making up a number, pulling a number out of thin air with no justification behind it.

07:09 Developing a contingency reserve properly means having the ability to justify it.

07:13 Now don't forget with any contingency reserve, if that contingency reserve isn't used, it's returned back to the organization, not kept to the side to use for future and identified uncertainty.

07:25 Remember that point for the exam as well that may be different from your current experience. The other type of reserve that we may choose to build up is a management reserve.

07:36 Now, the contingency reserve is always under the control of the project manager and approved as part of the project budget.

07:43 The management reserve, however, is not, as the name implies, the management reserve is under the control of management.

07:52 A lot of organizations have as a particular percentage of their total capital spin, say, five per cent or 10 per cent, as allocated as management reserve. And the purpose of management reserve is if a project encounters unknown, unknown unknowns or unforeseen uncertainty, it can apply to management to use that reserve to help it out financially.

08:17 So for the purposes of the exam, make sure you understand the difference between contingency reserve and management reserve.

08:26 Another tool or technique we may choose to use is the expert judgment.

08:32 Obviously, when putting together a budget, the types of experts you may wish to consult well, you for a start or as project manager.

08:40 Your project team members, members of your organization's finance and accounting team may want to help you as well, as well as external consultants specializing and cost estimating and data preparation professions such as quantity surveyors, for example.

08:58 Another total technique that you may find useful is historical relationships. And this is a way for you to benchmark your current budget forecasts against recently completed projects. Just by checking what their spend profile was, when did they spend most money? When did they spend the least money? What was the shape of their budget? How easy was it for them to get the money coming in? What problems did they had paying money out? So look at your historical relationships with budget to help improve your own current budget.

09:34 Now, the final total technique, its funding limit reconciliation.

09:39 This is something you may need to take into account and determine in your budget.

09:44 Your organization may have some limits on when it has the funding available to it, and it's certainly not uncommon for an organization to say for this calendar year or this financial year, we only have $1 million available.

10:01 Yes, we want to do your project, but we simply can't afford it this year.

10:06 And therefore, due to funding limit reconciliations, your project may be put off until the following year.

10:13 The other way to look at funding limit reconciliations, particularly for government departments who often operate on a use it or lose it basis as as you near the end of that financial year and you've got funds that you haven't spent yet, your push to spend those very quickly.

10:31 Otherwise, you may lose them.

10:33 So take into account the funding limit reconciliation issues when putting together your project budget.

10:42 Let's take a closer look at some of those tools and techniques, as I've already mentioned, the contingency reserve is part of the approved project budget under the control of the project manager and is for known unknowns.

10:56 The key point for the exam is if that uncertainty doesn't eventuate, then you don't keep the contingency reserve for something that may or may not happen in the future. You return it to the organization.

11:08 This may be different from your current experience.

11:11 The other type of reserve is the management reserve, which is under the control of management, and a project manager can apply to use it if they encounter unknown unknowns.

11:23 So for the exam, make sure you understand the difference between contingency reserves and management reserves.

11:31 Once you've done all of these things, you will produce your cost baseline.

11:37 This is your project budget.

11:40 It's the baseline by which you're going to measure cost and financial performance on your project going forward.

11:46 It's also one of three common baselines used in the profession of project management.

11:51 The other two being the scope baseline and the time or schedule baseline.

11:59 You'll also have your project funding requirements.

12:02 This is particularly important where you have to take specific consideration of how your project will be funded.

12:10 Some projects have to be funded through external sources, credit facilities, bank overdrafts, loans.

12:18 Call on shareholders funds and each of these comes with a cost. And it may be that you need to take into account the cost of project funding.

12:31 And as we've already discussed with the funding limit reconciliation technique, you want to look at the timing of your project funding as well.

12:41 Another output that you may choose to update is your project documents.

12:46 These are just anything as part of your commitment to continuous improvement.

12:49 Any part of your methodology relating to the development of the project budget.

12:55 So let's take a closer look at the difference between costs and budget.

13:00 Using these diagrams.

13:03 Now, this is a simple spreadsheet showing individual cost estimates for defined activities.

13:10 So over on the left hand side, we have developed code code testing, site acceptance, testing, installation at client site commissioning and hand over.

13:22 And we have cost estimates for each of those.

13:25 You can see our cost estimates for developing the code is a total of $21,500 spread out over January $5000.

13:37 February $7,500 and March $9000. You can also see our cost estimates there for code testing, site acceptance testing, installation at client site commissioning and handover handover has a total cost estimate of $5,750 planned to be incurred in September.

14:00 So those are individual cost estimates and through the process of aggregation, we can put cumulative totals into January, February, March, April, May, June, July, August and September.

14:15 And then we add those up to get a running cumulative total so that we can see over our project. We start by spending $5000 in January.

14:24 We spend an additional $7,500 in February to give us a total spend of $12,500 and so on and so on.

14:33 So those figures up there, our individual cost estimates, when we put them into this diagram, what we get is our project budget and that's that line which shows our planned spend on the project.

14:47 Now, interestingly enough, that point at the end is our budget at completion.

14:55 This is particularly important to know when we come to the earned value management technique and the control costs module.

15:04 Because we need to know that budget at completion in order to calculate our own value management calculations.

15:11 So there we are.

15:12 That's the difference between costs and budget.

15:18 So in summary.

15:22 We've looked at the use of the cost management plan, individual cost estimates and the project's schedule to produce an agreed and approved project budget in the developed budget process.

15:37 Thank you. This has been an introduction and overview of the develop budget process in the PMBOK guide.