What Is a Cost Baseline in Project Management? A Quick Guide

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Most projects have stakeholders that expect a return on their investment. For that to happen, the project must meet its deadline and stay within budget. To create a project budget, you first need to create a cost baseline so you can compare planned spend to actual spend.

It’s with this cost baseline that you can make cost estimates for each task of your project and see if you’re on target or overspending. Let’s take a moment to fully understand this cost management basic concept and how you can use it to keep your project on track.

What is a Cost Baseline in Project Management?

A cost baseline is the budget that has been approved for the project, broken down into a list of salaries, materials, equipment and more. It’s the sum of the cost estimates for all the tasks on your project schedule. Once you have a cost baseline, you need to add a management reserve, which is a portion of the project budget that’s used as a contingency reserve for management control and unexpected costs. Those two elements make up your project budget.

Creating a budget is the first step in tracking your expenses. Like any project management baseline, a cost baseline is used to compare actual spend versus cost estimates.

Ideally, the cost estimates and actual project costs numbers should match or, better yet, the actual costs should be lower than the cost baseline. If the actual costs are higher, then you’re overspending. This throws up a red flag that your project is in danger of failing due to exceeding the budget.

You want to set the baseline between the project planning phase and the start of executing the project. The budget baseline shouldn’t be touched unless there is a major change in the project scope, resources or cost estimates; for example, delays, budget overrun or loss of key resources. The budget baseline can only be changed through a change request.

Using project management software helps you track costs in your project. ProjectManager is an award-winning cost management software that lets you set a project baseline and compare your actual costs to your cost estimates. Try ProjectManager free today!

ProjectManager's Gantt chart, a tool for creating a schedule and cost baseline
ProjectManager lets you easily set a project baseline to keep your project on track.—Learn More!

What’s Included in a Project Cost Baseline?

A cost baseline is the authorized spending plan across the life cycle of the project. It includes every project activity, task and associated resources that are needed for a project.

This includes any contingency reserve funds that are set aside to deal with potential issues that you identify in a risk analysis. These issues can put the project behind schedule, impact the quality of its deliverables and, of course, make you go over budget.

Why Are They Important?

Setting a cost baseline is important because keeping to your project budget is important. Going over budget is a sure sign that your project is heading in the wrong direction. Miss the mark with the budget, and you’re going to have some unhappy stakeholders.

The cost baseline is a bottom-line issue, but it’s also a way to assess cost variance, cost performance and planned effort versus actual effort. Without a baseline, you have nothing to measure your spending against and control costs. Few things are more important than cost management when managing a project.

How to Create a Cost Baseline

Creating a cost baseline begins with estimating the total project costs. This includes the tasks, and the resources needed to accomplish them. The easiest way to do this is task by task. Estimate the cost of labor, materials, etc., then add it all up. This is the initial estimated budget for the project.

Bear in mind that the true cost of any task might not be clear during the planning stage of the project. You could come to find that material costs have risen or other unforeseen additional costs. You might also need more time to accomplish your project, which also impacts costs.

That’s why it’s important to have a contingency reserve earmarked in the budget to address project risks. Once this is all in place, you’ll want to manage your project with project management software. That way, you can set a project baseline and automatically calculate project variance as you work.

What’s the Difference Between a Project Budget and a Cost Baseline?

A cost baseline is not the same as a project budget. Instead, the cost baseline is the first step to create a project budget. First, you need to gather all the cost estimates for each project task and add a management reserve for unexpected expenses. Once you have those, you can create a project budget that includes all the funds required to execute your project.

When your project starts, the project budget will be used to approve project costs and keep track of expenses while the cost baseline will be used to compare the actual costs of the project against the cost estimates that were first registered in the cost baseline.

The cost baseline is also used as a metric to measure cost performance. Your budget is the best estimate for what you expect the cost of the project to be. Therefore, you can call the cost baseline the budget baseline, because it’s a ruler you use to measure cost performance.

The confusion is understandable. A cost baseline is used to measure the budget, while the budget itself is part of the project planning process. Budgeting takes place near the beginning, while cost baselines are a cost management tool to measure progress during the execution.

How ProjectManager Sets Your Budget Baseline

Creating a cost baseline is one of the most effective ways you can measure the cost performance of your project. ProjectManager is a cloud-based project management software that collects your project data in real-time, giving you the information you need to make informed cost management decisions and keep your project operating as planned.

Plan on Gantt Charts

Before you can set a cost baseline, you need to make a project plan. ProjectManager’s online Gantt chart lets you chart your work on a visual timeline, link dependencies and set milestones. Once done, you can filter for the critical path and set a schedule baseline to measure your progress. All of this can be seen on the Gantt chart, which can be shared with the entire project team.

ProjectManager's Gantt chart, showing its schedule baseline features

Track Progress in Real-Time on Dashboards

For a high-level view of the project, you can use ProjectManager’s real-time dashboard. The dashboard is set up and ready to measure project costs, project variance (and much more!), all automatically displayed in easy-to-read graphs and charts.

ProjectManager's project management dashboard, ideal to keep track of a cost baseline

Create Reports on Variance Instantly

Stakeholders want to know that you’re staying on budget. ProjectManager has one-click reports that display project and portfolio status. There’s also a project variance report. All reports can be filtered to show only the information you want to see.

ProjectManager's status report, a project management tool to keep track of project costs

ProjectManager is award-winning software that organizes your tasks, teams and projects so you can stay on budget and schedule. ProjectManager’s collaborative platform connects teams and gives managers the transparency they need to keep everyone on target. Join tens of thousands of teams from NASA to Ralph Lauren who use ProjectManager to deliver on time and within budget. Try ProjectManager free today.

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