HKSM

The process of combining cost estimates, timing them according to the schedule, and adding reserves to produce an approved cost baseline and funding profile for the project.

Purpose & When to Use

Develop Budget turns cost estimates into an authorized, time-phased plan for spending. It sets the project’s cost baseline and funding needs so performance can be tracked. Use it after activity/resource estimates and the schedule are available, and revisit it when major scope, schedule, risk, or funding changes occur.

Mini Flow (How It’s Done)

• Collect inputs: scope and WBS, cost estimates, schedule, resource rates, risks and planned responses, contracts and proposals, organizational policies, funding constraints, historical data, and lessons learned.
• Aggregate costs by WBS: roll up labor, materials, services, facilities, and indirects from activities to work packages and control accounts.
• Time-phase the totals: spread costs across the timeline using the schedule, calendars, and payment terms to create a cash-flow curve.
• Add reserves: include contingency for known risks and keep management reserve outside the baseline under sponsor control.
• Model constraints: reflect taxes, exchange rates, escalation, funding caps, and procurement milestones; adjust plan or schedule if spending exceeds limits.
• Analyze and optimize: run what-if scenarios, balance scope, schedule, and cost, and update risk responses as needed.
• Finalize and approve: document assumptions, methods, and reserve rationale; obtain approval of the cost baseline and funding profile.
• Set up monitoring: define reporting periods, earned value measures, thresholds, and change control for baseline updates.

Quality & Acceptance Checklist

• Budget aligns with approved scope, WBS, and schedule logic.
• All cost elements included: direct, indirect, cost of quality, procurement, travel, facilities, and fees.
• Time-phased baseline produced with clear cash-flow profile.
• Contingency reserve linked to quantified risks; management reserve held outside the baseline.
• Assumptions, rates, escalation, taxes, and exchange rates documented.
• Funding needs align with organizational caps and fiscal periods.
• Baseline is traceable to estimates and supported by backup data.
• Approval recorded and performance metrics defined (for example, BAC and reporting cadence).
• Change control path for budget adjustments is defined.

Common Mistakes & Exam Traps

• Lumping all costs into one total instead of time-phasing them.
• Placing management reserve inside the cost baseline rather than keeping it separate.
• Double-counting risk by adding both padded estimates and contingency reserve for the same risk.
• Ignoring indirect costs, taxes, escalation, or exchange rate impacts.
• Not reconciling the spending curve with funding caps and payment terms.
• Confusing the approved baseline (BAC) with ongoing forecasts like EAC.
• Updating the baseline for variances without going through change control.
• Missing procurement timing, causing cash-flow spikes that exceed limits.

PMP Example Question

A project’s time-phased budget exceeds the sponsor’s quarterly funding cap in Q2. What should the project manager do first?

1. Request more funds to cover the Q2 spike.
2. Delay scope until Q3 without assessing impacts.
3. Re-sequence work or adjust procurement/payment terms to align spend with the cap, then evaluate impacts and seek approval if needed.
4. Reduce contingency reserve to fit the cap.

Correct Answer: C — Re-sequence work or adjust procurement/payment terms to align spend with the cap, then evaluate impacts and seek approval if needed.

Explanation: Align the cash-flow profile with funding limits by adjusting timing before cutting scope or reserves. Changes to schedule or commitments should be analyzed and approved through governance as needed.