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Working with Cost Baselines

In the midst of our ongoing projects, organizations need a tool to assess projects performance to ensure that those projects are being accomplished as per the approved plans and they are going to meet the project objectives. Therefore, it is recommended to utilize Project baseline tools to keep projects on track.

Definition

Let us first define this tool. A project baseline is a known state by which something is measured or compared.

In other words, we need a reference point (Baseline) where we can measure the actual performance against and decide if the work accomplished meet or exceed that reference point.

Baseline can be used to measure different project area performance. We can have Scope baseline, Time baseline, Cost baseline ….etc

For example, in a project where we are planned to finish the first phase in two weeks, it means our time baseline for this phase is two weeks. Thus, whenever we want to measure our time performance for this particular phase, we compare our actual accomplishment duration (let’s say the actual was 3 weeks) against our original time baseline (2 weeks). Accordingly, we can assess our performance in terms of Time and figure out that our first phase of the project is delayed by 1 week.

Cost Baseline

As illustrated for baseline, cost baseline is a reference point in which we can compare our actual cost against.

So, if we have a project with $ 500,000 cost estimation, this amount would be our cost baseline. During the project execution, we should measure the actual cost against the project cost baseline ( $ 500,000) to see whether we execute our project on, above , or below the cost baseline.

Integrated Cost Baseline

Maintaining a cost baseline is essential to ensure the project cost is controlled and project is being executed within the approved budget. However you may be surprised if I tell you that there are numerous projects that had cost baselines and cost control process, but ended up being over budget (where the actual project cost exceeded the project cost baseline)

What is the benefit of the baseline then?

Actually, most of the projects are using a traditional approach of cost control process when they compare the cost baseline against the actual cost (one dimension) and neglecting other important project area.

For example, at the beginning of a project with $ 500,000 (Cost Baseline), the cost control report might look like the following figure:

 cost-baseline

Where the actual cost = 0.

During project execution, project team may conduct several cost control processes and come up with these cost performance reports:

 cost-baseline

Suddenly, their cost control report shows that the project has exceeded its budget limit and the status of the project has changed to over budget situation.

 cost-baseline

This might happen when we measure the project cost performance without taking into consideration other project components like: the scope progress (physical project accomplishment) or the time elapsed.

To overcome this drawback in the traditional cost control process, it is recommended to establish a Cost Baseline integrated with the work progress and project schedule as defined in PMBOK®5th.

PMBOK®5th Edition defines the Cost Baseline as:

An authorized time phased budget at completion (BAC), used to measure, monitor, and control overall cost performance of the project.

This means, the project cost baseline should be integrated with the project schedule and the work to be completed cumulatively. As we can see in the following example:

Let us take the previous project with $ 500,000 Cost estimation. First, we will break it down to its phases and durations and then plot the cumulative cost against its phase schedule as follows:

cost-baseline

cost-baseline

So, the proper way to assess the project cost performance is to compare the planned of the three components (Work Progress, Budgeted Cost, and Planned Duration) against the actual one, to see if that particular project element (Phase/Task) has been completed (100 %) within the approved budget and schedule.