Cost Budget

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harin4627
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Cost Budget

Postby harin4627 Wed Jul 02, 2014 6:52 pm

After doing bottom up estimating, you derive the total estimated cost of a project as $300,000. The contingency reserve is $10,000. The management has kept the reserve of $15,000. What is the cost budget of the project?
$310,000
$320,000
$325,000
$315,000

What is the definition of cost budget? I am not sure whether it is really the "project Budget which includes management reserve"

Any thoughts on this?
Venkat
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Re: Cost Budget

Postby Venkat Wed Jul 02, 2014 7:37 pm

Hi,

Cost Baseline = estimated costs of the project + contingency reserve

Cost Baseline = (300, 000 + 10, 000) which is equal to 310, 000.

Cost Budget (Project Budget) = Cost Baseline + Management Reserves.

Cost Budget (Project Budget) = (310,000 + 15, 000) which is equal to 325, 000.

Answer is 325, 000.

Explanation:
Project estimates are the bottom up summation of all the costs that are estimated from the activity level to the work package level and to control account. On top of this cost estimation, a contingency reserve will be added added to deal with risks (known-unknows) or any other cost issues that may occur during project execution. The summation of these costs (project estimates and contingency reserve) will make the cost baseline.

Once the Cost Baseline is done, a management reserve (unknown-unknown risks) will be added to it finalize the cost (project) budget. Basically cost budget or project budget are the same.

There is a nice picture in PMBOK on page 213 with which the project budget can be well visualized.

This is my understanding, Saket and Namita correct me if i'm putting anything rubbish here.

Feel free to get back if anything is not clear.

Thanks,
Venkat
Last edited by Venkat on Wed Jul 02, 2014 8:14 pm, edited 1 time in total.
harin4627
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Re: Cost Budget

Postby harin4627 Wed Jul 02, 2014 7:43 pm

thanks Venkat.
Just wanted to check the term "Cost Budget".to make sure that the real meaning is project budget...I have heard cost budget as cost basline. I checked PMBOK, but there is no reference about this. PMBOK talks about "project budget"only.
Venkat
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Re: Cost Budget

Postby Venkat Wed Jul 02, 2014 8:21 pm

Yes, you are right, in PMBOK we do not see this word. But on the projects we generally use this term.
namita
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Re: Cost Budget

Postby namita Thu Jul 03, 2014 3:56 am

Agree with venkat. Also Budget is a word which talks $. Whether we put cost before it or not, its always understood that budget is money :)

I hope its clear. There is a picture in PMBOK5 page 213 clearly showing components of cost baseline and Budget

Feel free if any follow up question is there

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