The Importance of a Baseline Budget for a Project

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A baseline budget is the one you draw up when you start a project. Part of the importance of budgeting in project management is that it gives you a picture of how much you're going to spend and when you'll need to spend it. Comparing the reality to the baseline lets you know if your baseline budget projections were on track.

Setting the Baseline

Before a project launches, the manager needs a baseline for the scope, schedule and cost. What will the project team do, when will they do it, and how much are they supposed to spend? The baseline costs typically include labor, equipment, materials and direct overhead cost.

Direct overhead includes expenses such as utilities, maintenance and rent for the premises from which you're working. Labor, materials, subcontractors and equipment expenses are direct costs. The project's indirect costs include insurance, administration, security and depreciation on equipment.

To budget effectively, you need to go into detail. If you're building a new consumer electronics product, and you need a dozen different components, budget for each component individually.

Preparing for the Unknown

The project baseline should also budget reserves for unplanned expenses. A contingency reserve fund covers the risks you know about, while a management reserve is for risks you don't know are out there. The different purposes are described as "known unknowns" and "unknown unknowns."

Importance of a Time-Phased Budget

The importance of a time-phased budget is to ensure the money is available when the team needs to spend it. The baseline budget tracks cash flow – not when the project team gets a bill but when the company has to disburse money to pay vendors, consultants or marketers. Without a timeline, you could get caught short with no cash on hand when payment is due.

The time-phased aspect is important for other reasons:

  • If you need to borrow money for the project, the time-phased baseline budget explains why.

  • Project planning compares project cost to the project's value. Knowing when you need to spend cash helps figure out the cost.

  • It helps you break down and explain the amounts you're committed to spend, the actual payments and spending approvals.

Change in Scope

The importance of budgeting in project management isn't that everything will conform to your baseline once you draw it up. Instead, it's that having a baseline budget helps you monitor the changes and see where costs departed from your projections. In some cases, it's not because of unexpected expenses but because the project scope has changed.

  • Your initial baseline didn't spell out the project requirements clearly. Now that you and your team have your hands dirty, you can see where revisions are necessary.

  • The laws or regulations changed. Immigration and visa restrictions can make it harder, slower and more expensive to hire people from overseas, for instance.

  • A stakeholder decides that he wants something different. You're working on devising a customer's website, for instance, and he suddenly wants to include GIFs, a blog or some other feature.

  • Someone new with new ideas assumes oversight of the project.

  • The company's strategy changes, for example in response to competitors' moves. In a worst-case scenario, your project gets its budget gutted, or it is shut down completely.

  • Technology changes. If a project runs for a couple of years, the tech your team uses at the end may be very different from what you started with.

  • Financially, you have to scale back and complete a more modest project than the original plans.

Rebooting the Baseline

If the scope changes, the baseline budget will need to change too. You'll have to go back to the drawing board, take into account the new costs and goals and draw up a new, revised set of estimates. These become the new baseline budget.

Don't throw away the old baseline. Comparing it to the revised version will give you some perspective on how things changed and what financial effect the changes had. The more you understand, the more accurate your baseline budgets will become down the road.

References

About the Author

Fraser Sherman has written about every aspect of business: how to start one, how to keep one in the black, the best business structure, the details of financial statements. He's also run a couple of small businesses of his own. He lives in Durham NC with his awesome wife and two wonderful dogs. His website is frasersherman.com

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