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Cost baseline

A time-phased, approved budget for the project work, used as the target for measuring and controlling cost performance. It includes cost estimates and contingency reserves but excludes management reserve.

Key Points

  • The cost baseline is the approved, time-phased budget used to measure and control cost performance.
  • It is built from aggregated cost estimates and contingency reserves, but it excludes management reserve.
  • It provides planned value (PV) for earned value management and supports S-curve reporting.
  • Once approved, it is frozen and can be changed only through formal change control.
  • It is expressed by time period and aligned with the project schedule and funding cycles.
  • Project funding requirements equal the cost baseline plus management reserve.

Purpose

  • Set a clear spending target to guide delivery teams and stakeholders.
  • Enable objective variance analysis and trend tracking against planned value.
  • Support forecasting of final costs using earned value and other methods.
  • Align budget releases and cash flow with the timing of planned work.
  • Provide a common reference for reporting and decision making.

Pre-requisites

  • Approved scope baseline and work breakdown structure.
  • Developed schedule with dates, logic, and resource loading.
  • Detailed cost estimates with basis of estimate and resource rates.
  • Risk analysis results and defined contingency reserves.
  • Cost management plan including measurement methods such as EVM.
  • Organizational financial calendars, funding constraints, and contract terms.

How to Set Baseline

  • Aggregate cost estimates at work package or control account level, including applicable indirects.
  • Time-phase the budgets according to the approved schedule and resource calendars.
  • Include contingency reserves within the relevant control accounts; exclude management reserve.
  • Reconcile the time-phased budget with funding limits and adjust sequencing if needed.
  • Prepare artifacts such as the time-phased budget table, S-curve, and control account budgets.
  • Review with key stakeholders, then obtain formal approval and record version, date, and approver.
  • Store the baseline in a configuration-controlled repository and communicate it to the team.

How to Use

  • Compare actual cost (AC) and earned value (EV) against planned value (PV) to assess performance.
  • Calculate variances and indices such as CV, SV, CPI, and SPI, and forecast EAC.
  • Monitor period and cumulative trends to trigger corrective or preventive actions.
  • Coordinate with the schedule to manage cash flow and funding releases.
  • Report status regularly using the baseline as the reference for all cost metrics.

Change Control Rules

  • Any change to the cost baseline requires an approved change request.
  • Re-baseline only for significant, approved changes to scope or the plan, not to hide variances.
  • Maintain version history and document the reason and impact of each change.
  • Assess effects on scope, schedule, risks, and funding before approval.
  • After approval, update EVM references, forecasts, and stakeholder communications.

Example

A project has a cost baseline (BAC) of 500,000, time-phased across four months: M1 100,000; M2 150,000; M3 150,000; M4 100,000. Management reserve of 50,000 is held outside the baseline. At the end of M2, PV is 250,000, AC is 270,000, and EV is 220,000. Cost variance CV = EV - AC = -50,000 and CPI = EV / AC = 0.81. If no changes are approved, EAC can be forecast as BAC / CPI ≈ 500,000 / 0.81 ≈ 617,000, highlighting the need for corrective action or a formal change.

PMP Example Question

During execution, actual costs run higher than planned. The sponsor asks you to adjust the cost baseline to match the new forecast so variances disappear. What should you do?

  1. Re-baseline immediately so reports reflect reality and show zero variance.
  2. Submit a change request through integrated change control before modifying the baseline.
  3. Add management reserve into the cost baseline to cover the overrun.
  4. Update the cost baseline only in the cost management plan without formal approval.

Correct Answer: B - Submit a change request through integrated change control before modifying the baseline.

Explanation: Baseline changes require formal approval. Management reserve is outside the cost baseline and should not be used to mask variances.

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