4.5 Planning & Managing Budget

Project Management Professional PMP

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1 Chapter 1: Introduction & Fundamentals

1.1 About the PMP Exam 1.2 What is a Project? 1.3 Project, Program & Portfolio Management 1.4 The Project Manager Role 1.5 PMBOK 7 Principles Overview 1.6 Performance Domains Overview 1.7 What Changed in the July 2026 PMP Exam

2 Chapter 2: People Domain Part 1

2.1 Managing Conflict 2.2 Leading a Team 2.3 Supporting Team Performance 2.4 Empowering Team Members 2.5 Training & Development 2.6 Building a Team 2.7 Removing Impediments

3 Chapter 3: People Domain Part 2

3.1 Negotiating Project Agreements 3.2 Collaborating with Stakeholders 3.3 Building Shared Understanding 3.4 Engaging Virtual Teams 3.5 Defining Team Ground Rules 3.6 Mentoring Stakeholders 3.7 Emotional Intelligence

4 Chapter 4: Process Domain - Planning

4.1 Determining Project Methodology 4.2 Integrating Project Planning 4.3 Planning & Managing Scope 4.4 Planning & Managing Schedule 4.5 Planning & Managing Budget 4.6 Planning & Managing Quality 4.7 Planning & Managing Resources 4.8 Planning & Managing Procurement

5 Chapter 5: Process Domain - Execution & Control

5.1 Executing with Urgency for Value 5.2 Managing Communications 5.3 Assessing & Managing Risks 5.4 Engaging Stakeholders 5.5 Managing Project Changes 5.6 Establishing Project Governance 5.7 Managing Project Issues 5.8 Managing Project Artifacts 5.9 Knowledge Transfer & Closure

6 Chapter 6: Business Environment Domain

6.1 Planning & Managing Compliance 6.2 Evaluating & Delivering Benefits 6.3 External Environment Changes 6.4 Supporting Organizational Change

7 Chapter 7: Agile & Hybrid Approaches

7.1 Agile Mindset & Values 7.2 Scrum Framework 7.3 Kanban & Lean 7.4 Extreme Programming (XP) 7.5 Hybrid Project Management 7.6 Agile Planning & Estimation 7.7 Agile Metrics & Tools

8 Chapter 8: Predictive (Waterfall) Approaches

8.1 Predictive Lifecycle 8.2 Scope Management 8.3 Schedule Management 8.4 Cost Management 8.5 Quality Management 8.6 Risk Management Process 8.7 Procurement & Contracts 8.8 Change Control

4.5 Planning & Managing Budget

Key Takeaways Explain This Topic AI

Cost estimating techniques include analogous (least accurate), parametric (uses statistical relationships), bottom-up (most accurate), and three-point (PERT) estimating

The cost baseline is the approved time-phased budget used to measure and monitor cost performance, excluding management reserves

Contingency reserves address identified risks (known unknowns) and are part of the cost baseline, while management reserves address unidentified risks (unknown unknowns)

Estimate accuracy improves through project phases: ROM (-25% to +75%), Budget (-10% to +25%), and Definitive (-5% to +10%)

Earned Value Management (EVM) uses Cost Performance Index (CPI = EV/AC) and Schedule Performance Index (SPI = EV/PV) to measure project performance

Last updated: January 2026

Cost management ensures the project is completed within the approved budget. It involves estimating costs, determining the budget, and controlling expenditures throughout the project.

Cost Management Processes

• Process Purpose Key Output
• Plan Cost Management Establish policies and procedures for cost management Cost Management Plan
• Estimate Costs Approximate monetary resources needed Cost Estimates
• Determine Budget Aggregate estimates to establish cost baseline Cost Baseline
• Control Costs Monitor status and manage cost changes Work Performance Information
• Cost Estimating Techniques
• Comparison of Techniques

• Technique Accuracy Time/Cost Best Used When
• Analogous -25% to +75% Lowest Early phases, limited information
• Parametric -10% to +25% Moderate Historical data available
• Bottom-Up -5% to +10% Highest Detailed WBS available
• Three-Point Varies Moderate Uncertainty exists
• Analogous Estimating (Top-Down)

Uses costs from previous similar projects as the basis for estimates:

Example : "The last website project cost $50,000, so this similar one should cost about $50,000."

• Advantage Disadvantage
• Quick and inexpensive Less accurate
• Useful with limited information Depends on similarity
• Good for high-level budgeting May not account for differences
• Parametric Estimating

Uses statistical relationships between historical data and other variables:

Example : Cost per line of code x estimated lines of code

• Cost Parameter Unit Rate Quantity Estimate
• Software coding $50/line 10,000 lines $500,000
• Testing $20/test case 500 cases $10,000
• Documentation $100/page 200 pages $20,000
• Total $530,000
• Bottom-Up Estimating
• Estimates individual work packages and aggregates them: Project Total: $530,000
• ├── Phase 1: $80,000
• │ ├── WP 1.1: $30,000
• │ └── WP 1.2: $50,000
• ├── Phase 2: $250,000
• │ ├── WP 2.1: $100,000
• │ ├── WP 2.2: $100,000
• │ └── WP 2.3: $50,000
• └── Phase 3: $200,000
• ├── WP 3.1: $150,000
• └── WP 3.2: $50,000
• Most accurate estimating technique
• Most time-consuming and expensive
• Requires detailed WBS
• Three-Point Estimating

Uses optimistic, most likely, and pessimistic estimates:

• Beta/PERT Formula : E = (O + 4M + P) / 6
• Triangular Formula : E = (O + M + P) / 3

Example :

• Optimistic: $80,000
• Most Likely: $100,000
• Pessimistic: $150,000
• PERT Estimate = ($80,000 + 4($100,000) + $150,000) / 6 = $103,333
• Estimate Accuracy Levels

• Level Accuracy Range Project Phase Purpose
• Rough Order of Magnitude (ROM) -25% to +75% Initiation Feasibility, go/no-go decisions
• Budget Estimate -10% to +25% Planning Budget authorization
• Definitive Estimate -5% to +10% Detailed Planning Baseline, contracts
• Progressive Elaboration of Estimates

Estimates become more accurate as the project progresses:

• Initiation : ROM estimate based on analogous data
• Early Planning : Budget estimate using parametric methods
• Detailed Planning : Definitive estimate using bottom-up approach
• Cost Baseline Development

The Cost Baseline is the approved, time-phased budget used to measure and monitor project cost performance.

From Estimates to Baseline

Component Description Included in Baseline?

• Activity Cost Estimates Cost of individual activities Yes
• Contingency Reserves For identified risks (known unknowns) Yes
• Cost Baseline Time-phased spending plan Yes
• Management Reserves For unidentified risks (unknown unknowns) No
• Project Budget Cost Baseline + Management Reserves Total funding
• Visual Representation Project Budget
• ↓
• ┌─────────────────────────────────────┐
• │ Management Reserves │ ← Unknown unknowns
• ├─────────────────────────────────────┤
• │ Cost Baseline │ ← Performance baseline
• │ ┌─────────────────────────────┐ │
• │ │ Contingency Reserves │ │ ← Known unknowns
• │ ├─────────────────────────────┤ │
• │ │ Activity Cost Estimates │ │ ← Work package costs
• │ └─────────────────────────────┘ │
• └─────────────────────────────────────┘
• Contingency and Management Reserves
• Contingency Reserves
• Address identified risks (known unknowns)
• Part of the cost baseline
• PM has authority to use
• Calculated through risk analysis
• Management Reserves
• Address unidentified risks (unknown unknowns)
• NOT part of the cost baseline
• Requires sponsor approval to use
• Typically a percentage of project budget
• Reserve Calculation Example

• Component Amount Calculation
• Base Estimate $400,000 Sum of activity estimates
• Contingency Reserve $40,000 10% for identified risks
• Cost Baseline $440,000 Base + Contingency
• Management Reserve $44,000 10% of baseline
• Project Budget $484,000 Baseline + Management Reserve
• Funding Requirements

The funding limit reconciliation ensures that expenditures are reconciled with funding limits:

Funding Patterns

• Pattern Description Example
• Front-loaded More funding early Capital purchases upfront
• Back-loaded More funding later Labor-intensive completion
• Linear Even spending over time Steady-state operations
• S-Curve Gradual start, peak, gradual end Typical project pattern
• Cash Flow Planning
• Identify when funds are needed
• Align with organizational funding cycles
• Account for payment terms with vendors
• Consider revenue timing if applicable
• Earned Value Management (EVM) Basics

Earned Value Management integrates scope, schedule, and cost to assess project performance.

Key EVM Metrics

• Metric Formula Meaning
• Planned Value (PV) Budgeted cost of work scheduled What should have been done
• Earned Value (EV) Budgeted cost of work performed What has been accomplished
• Actual Cost (AC) Actual cost of work performed What was actually spent
• Performance Indices

• Index Formula Interpretation
• Cost Performance Index (CPI) EV / AC > 1.0 = Under budget, < 1.0 = Over budget
• Schedule Performance Index (SPI) EV / PV > 1.0 = Ahead of schedule, < 1.0 = Behind schedule
• Variance Analysis

• Variance Formula Interpretation
• Cost Variance (CV) EV - AC Positive = Under budget
• Schedule Variance (SV) EV - PV Positive = Ahead of schedule
• Example

• Metric Value
• PV (Planned) $100,000
• EV (Earned) $80,000
• AC (Actual) $90,000
• CPI 0.89 (over budget by 11%)
• SPI 0.80 (behind schedule by 20%)
• CV -$10,000 (over budget)
• SV -$20,000 (behind schedule)
• Key Takeaways
• Analogous is fastest but least accurate; Bottom-up is most accurate but slowest
• Parametric uses statistical relationships with historical data
• Three-point accounts for uncertainty using optimistic, most likely, and pessimistic estimates
• Contingency reserves are for identified risks and are in the cost baseline
• Management reserves are for unidentified risks and are NOT in the cost baseline
• EVM uses PV, EV, and AC to measure cost and schedule performance

Loading diagram... Project Budget Components