Tuesday, June 3, 2008

The Cost Baseline

Project management is like baseball: You need to follow a baseline or else you will have a hard time bringing the project "home." The cost baseline is a time-phased budget that is used to measure and monitor project cost performance. It is established during the budgeting phase of the project.

Cost budgeting uses cost estimates, the Work Breakdown Structure, and the project schedule to create the cost baseline. The cost baseline is the plan that outlines how project costs are expected to be incurred over time.

Think of the cost baseline as a map that outlines planned cost performance. It is used to monitor where the project is, where it should be, and where it's going in terms of expenditures. The cost baseline is important to understand because:
  • it is the basis for project cost control
  • it serves as a benchmark for measuring cost performance
  • discrepancies from the cost baseline foreshadow problems
  • it gives everyone involved in the project a goal to work toward.
You establish the cost baseline by plotting the estimated total costs per time period on a graph. The resulting line usually takes the form of an S-curve. By reading the graph, you can see how costs are expected to be incurred over the life cycle of the project.

Large projects may have several cost baselines to measure various categories of spending. For instance, a project manager may want to measure labor costs separately from the expenses for materials and equipment.

The cost baseline is set in the planning stages of the project after a lot of time and effort has been spent on developing accurate cost estimates. Therefore, the cost baseline should change only if the project has changed substantially and only if there is no other way to control cost variances.

Day-to-day over- and underruns in costs are normal. Only persistent variances will warrant changing the cost baseline. Do not change the cost baseline if:
  • cost variances are normal and based on accurate estimates
  • cost variances are caused by poor cost estimating
  • normally occurring costs have been forgotten in the planning stage.
Change the cost baseline if:
  • there is a change to a project deliverable that will affect overall costs
  • there is a change in how the work will be done that will affect overall costs
  • there are major, unforeseen changes to project costs.
Remember, adjusting the cost baseline does not change the actual cost of the project—it just eliminates a negative variance. Therefore, changing the cost baseline should not be used as a means of managing variances.

The cost baseline serves as a guide for measuring project performance in terms of cost. Review the cost baseline when variances occur to ensure that the cost estimates used are as accurate and as realistic as possible.

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