CHAPTER 6

ESTABLISH BUDGET

6.1 Introduction

Establish Budget is the process of converting external requirements and constraints, such as the project charter, resource availability, cost estimates, and scheduling limitations, into cost budget which supports the planned execution of the project. Inputs and outputs are provided in Figure 6-1.

6.2 Inputs

6.2.1 Project Charter

The project charter provides the high-level project requirements and high-level product or service description of the project.

6.2.2 Responsibility Assignment Matrix

The RAM integrates the work breakdown structure (WBS) and organizational breakdown structure (OBS) identifying control accounts and precisely who is assigned responsibility and accountability for each WBS element. From those key management control points, all earned value data can be summarized.

6.2.3 Schedule Baseline

The schedule baseline is the approved version of a schedule model that is used as a basis for comparison to actual results. The process for establishing a budget baseline is iterative with that of creating the schedule baseline; the two must reconcile and support each other before the performance measurement baseline can be finalized.

6.3 Description

6.3.1 Establish a Budget Structure

Budget elements are tracked throughout the life of the project. The components of the project budget are listed here:

• Project (or contract) budget base (PBB (or CBB))
• Management reserve (MR)
• Performance measurement baseline (PMB)
• Undistributed budget (UB)
• Contingency reserve
• Distributed budget (DB)
• Summary level planning budget (SLPB)
• Control account
• Work package
• Planning package

Refer to Figure 2-4, which illustrates how the budget elements are related.

6.3.2 Develop the Cost Estimate

The cost estimate provides the basis for establishing the budget. Estimates are developed for each work package, planning package, and summary level planning budget. The estimates for work package must be robust enough to support the establishment of the performance measurement baseline, while those for planning packages and summary level planning budgets may have a lower level of detail until enough information is available to support the conversion to work packages. All cost estimates within control accounts must be developed within the time frames established for that work in the schedule baseline. Guidance for developing a cost estimate can be found in the Practice Standard for Project Estimating [6].

Once the cost estimates for work packages and planning packages within a control account are completed, they are reviewed by the project manager and the control account manager. The project manager may decide to authorize budget for an amount more, less, or equal to the cost estimate as follows:

• More budget may be authorized if the project manager is aware of likely future events, such as a change in rates, processes, or customer.
• Less budget may be authorized if the project manager is giving the control account manager a stretch goal or holding back reserve.
• Budget equal to the cost estimate may be authorized, particularly if risk analysis and reserves are handled outside of the control account.

6.3.3 Authorize the Work

Authorization is formal permission and direction, to begin a specific project effort, typically a control account. It is a method for sanctioning project work to ensure that the work is done by the identified organization, at the right time, in the proper sequence, and within the allotted budget. In its simplest form, the work authorization process follows these steps:

1. The project manager receives authorization to proceed with the project by means of a project charter or customer contract. This authorization may include limits on the funds available to the project manager and thus the amount of budget that may be authorized.
2. The project manager authorizes the next tier of management to proceed with the assigned work, usually by issuing a work authorization document (WAD). Typically this next level is the control account level, but sometimes there may be one or more additional levels between the total project and the control accounts. If so, each level can receive its own authorization and then continue the authorization within its prescribed, unbroken chain of authorization.
3. Should the organization's system call for it, there may be a step that includes functional manager concurrence or possibly authorization.
4. The control account manager may issue authorization to specific individuals indicating that they should begin work and notifying them of the scope, planned budget (often in hours), and the charge numbers required to be used.

6.3.4 Update the Project Budget Log

As work is authorized for control accounts, entries are made in the project budget log to show the movement of budget from undistributed budget to distributed budget. If the entire project is authorized into control accounts (or control accounts and summary level budgets), then the value of undistributed budget will be zero. Within control accounts, the budget will be authorized to work packages or planning packages. A typical project budget log might be structured in a similar fashion as Figure 6-2.

6.4 Outputs

6.4.1 Project Budget

The project budget is the authorized time-phased representation of how and when the project budgets will be distributed.

6.4.2 Project Funding Requirements

Total funding requirements and periodic funding requirements are determined based on the project cost estimates. If the funding available and the funding required are not consistent, the project may have to be replanned to meet funding constraints.

6.4.3 Project Budget Log

The project budget log is the central repository for all project budgets. At any time, the project manager should be able to review the project budget log and obtain a complete knowledge of the value and classification for every element of the project budget throughout the life of the project (see Figure 6-2).

6.4.4 Control Account Plans

The detailed plan for a control account is called a control account plan (CAP). The CAP contains all elements and aspects of the control account, some of which include:

• Name of the responsible control account manager
• Description of the work to be done
• Specific milestones to be accomplished
• Work packages that delineate the scope, schedule, and budget (incrementally, cumulative-to-date, and at completion) for specific well-defined tasks within the control account
• Planning packages that delineate the scope, schedule, and budget (incrementally, cumulative-to-date, and at completion) for specific future tasks within the control account
• Estimates to complete, which should be time-phased and may lead to an up-to-date representation of the total expected funding needed (the estimate at completion)

Figure 6-3 shows a sample control account plan.

6.5 Considerations

6.5.1 Budget Versus Funding

One of the key aspects of earned value management is the very specific terminology related to budget and funds. Budget is a work planning element that is earned (i.e., the earned value) when the corresponding work is done. Funds are the amount of money that is available to accomplish the work. One of the benefits of work authorization is that it allows the project manager to manage situations when full funding is not provided.

6.6 Summary

The budgeting process establishes the plan for creating a budget structure, developing the cost estimate, authorizing the work, determining funding requirements, and establishing budget logs and control account plans.