March 7, 2022
General
Tim Copeland

What Exactly is a Cost Baseline in Project Management?

Want to compare actual project spend to planned but don't know where to start? Start with developing a cost baseline for your project.

There's no getting around it: making sure there's enough money to complete the project plan is a key element of project management. Project cost management is a stressful part of most projects, especially when there seems to be extra cost involved at every turn!

Of course, budgeting is an important way to ensure success for your project - and you need to get your project budget as accurate as possible. One of the main outputs of the cost budgeting process is a cost baseline. But what exactly is a cost baseline - and how do you use it?

In this article, we'll discuss what a cost baseline is, how it differs from a budget, and how you can use it to see if your project is performing as well as expected.

financial management of projects

What is a cost baseline in project management?

Cost baselines, or cost performance baselines, are projected budgets that predict the overall cost of a project in a particular period. They are also called time-phased budgets because they are budgets that are linked to a specific time period. You will often find cost estimation illustrated with an S-curve to show how costs will be incurred over time.

This baseline represents the approved budget and provides a basis for comparing actual costs to planned costs. The cost baseline incorporates all aspects of the project including:

  • Project schedule and scope: All work that needs to be completed within a specific time frame to produce deliverables defined in a statement of work or contract.
  • Resources: People and materials required to complete tasks, including those within an organization and external vendor or supplier groups. Resources can include employees, contractors, subcontractors, equipment, and other assets used to meet requirements.

A cost baseline starts with an initial estimated budget. Once this detailed budget is approved by management, it is called the cost baseline.

The cost baseline is an important facet of calculating the Cost Index, according to the Project Management Institute, which is measured by the actual costs divided by the cost estimate. This is a measure of how cost-effective your project is.

cost baseline

The difference between project budget and cost baseline

The cost baseline and project budget are closely related - after all, they are both parts of the project management plan that look at how much money the project costs. However, they are used differently.

The cost baseline represents the approved version of the projected costs for the entire project. It is fixed, and, along with other aspects of the project baseline, is used as a benchmark for the rest of the project. The budget, on the other hand, may change as certain tasks come in above or below budget and funds are redirected from or to other tasks.

The cost baseline helps you see how well your real-life project is measuring up to your projections; the budget helps you see how much money you have to work with.

Of course, there will always be unexpected costs that are impossible to plan for. The cost baseline usually includes a management reserve for these unidentified risks. As the project progresses, these can be used as a contingency reserve to mitigate specific risks.

New to project accounting? Here's a complete starter pack:

Why is cost baseline important?

The cost baseline handles useful information for project managers and other stakeholders. This includes:

  • Deciding whether to give the green light. Thorough evaluation of the initial baseline allows stakeholders to judge whether the project is worth carrying out.
  • Keeping a project on budget. The cost baseline allows you to compare actual expenses to projected expenses at the same point in the project, and evaluate the overall cost performance. Without this information, you have no way of performing cost analysis and knowing if your project is exceeding its budget.
  • Overall performance evaluation. The project scope baseline, schedule baseline, and cost baseline together form the Performance Measurement Baseline. These project performance aspects ensure the project doesn't go off track.

How to set a cost baseline

As a project manager, it is best practice to set your project cost baseline well in advance. It's a detailed process: you will need to break down the expected costs for all of your planned activities. You will need to consider the following aspects when setting cost baselines.

Human resources

The project cost will depend on the resources allocated to it. Different members of one's team have different skills and specialties, suited for each specific task. Ensuring these are accounted for in the project baseline will help avoid going over budget later on.

Time estimates

The effort of a project corresponds to billable hours each person spends on the said project, so you need to be able to estimate the schedule of your team.

Material resources

These include the estimated cost of equipment, software, and materials that you will need for the project. Project managers can estimate material costs based on actual costs from previous projects, recorded in the project accounting system.

Contingency reserve

Most projects will experience unexpected expenses at some point, and it's important that your cost estimate has the flexibility to cope with this. Even though you will need to add a management reserve, you should also think about contingencies for any identified risks in your particular project plan.

Get a helping hand 👋

Using project management software is invaluable when it comes to this task. For example, reviewing the resources allocated to similar projects in the past can help you more accurately assess the resources you will need for the current project.

Successful companies use resource management software like Runn to schedule their resources and enable accurate cost management across multiple projects.

Key takeaway

Project baselines help you keep projects on track, and measure various project performance aspects against the initial plan. These include the scope baseline, schedule baseline, and cost performance baseline. A cost performance baseline is particularly important so you can monitor project costs to prevent overspending and protect the company's financials.

Looking for a resource management tool that can help keep your budget in sync with your cost baseline? Check out Runn and book a demo HERE!

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