## **Learning Outcomes**

After reading this article, you will be able to describe how to plan, estimate, allocate, and control a project’s budget and resources. You will recognize the relationship between scope, schedule, and cost; understand cost estimation techniques and cost baselines; distinguish various types of resources and their management; and apply earned value management (EVM) principles to monitor project performance. This will prepare you to answer PMP-style questions about budget and resource planning in both predictive and adaptive project environments.

## **PMP Syllabus**

For PMP, you are required to understand the principles and methods for planning and managing project budget and resources. For this area, focus your revision on the following points:

- Describe how to develop a project budget and resource plan based on project scope, schedule, and risk analysis.
- Apply cost estimation techniques (analogous, parametric, bottom-up, and three-point estimating).
- Distinguish between direct, indirect, fixed, and variable project costs.
- Explain how to aggregate and baseline project costs.
- Plan and control the allocation and release of physical and team resources.
- Use earned value management (EVM) to monitor project performance against cost and schedule baselines.
- Recognize the difference in budget/resource planning for predictive, adaptive, and hybrid approaches.
- Identify strategies for controlling budget variance and resource bottlenecks.

## **Test Your Knowledge**

_Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision._

1. Which cost estimating technique involves using statistical data and mathematical models to calculate project costs based on variables such as units produced?
2. What is the primary difference between a project’s cost baseline and the total project budget?
3. In an earned value analysis, if your project’s CPI is less than 1, what does this indicate?
4. Which document details the process and authority for approving changes to the project budget or resources?

## **Introduction**

Planning the project budget and resources is a fundamental step in delivering a successful project. As a project manager, you must estimate costs, plan resource availability, set baselines, monitor performance, and respond to possible variances or changes. A well-developed budget and resource plan reflects the true requirements of the project, enables realistic scheduling, and supports informed decision-making. Poor planning or failure to control budget and resources can result in overruns, missed deadlines, or inadequate quality. Therefore, effective project cost and resource management is essential for PMP candidates.

### Project Budget Planning Fundamentals

Planning the budget begins after high-level scope, scheduling, and risk analysis. You must develop a financial plan that includes all labor, material, equipment, training, risk reserves, and related costs. The process is cyclical: as the scope or risks are clarified, so too are cost and resource needs.

> **Key Term: Cost Baseline**
> The approved, time-phased budget for the project, excluding management reserves, used to measure and control cost performance.

### Cost Estimation Methods

Project cost estimation should be rigorous and well-documented. Four common methods are used:

- **Analogous Estimating:** Uses actual costs from previous, similar projects for a high-level estimate. Quick but less accurate.
- **Parametric Estimating:** Uses statistical or mathematical models (e.g., cost per unit, labor hours per meter) to calculate estimates based on project variables.
- **Bottom-up Estimating:** Sums detailed cost estimates for work packages or activities for a detailed and accurate prediction.
- **Three-Point Estimating:** Calculates expected value using optimistic, most likely, and pessimistic cost/duration estimates, either as a simple average or a weighted average.

> **Key Term: Analogous Estimating**
> A top-down estimation technique that uses actual costs of similar past projects to estimate current project costs.
>
> **Key Term: Parametric Estimating**
> Uses mathematical models based on historical data to estimate project costs or durations using variables relevant to the project.
>
> **Key Term: Three-Point Estimating**
> Determines expected cost or duration by averaging or weighting optimistic, most likely, and pessimistic estimates for each activity or work package.

### Types of Project Costs

Differentiate between cost categories for managing and reporting:

- **Direct Costs:** Attributable solely to the project (e.g., project staff salaries).
- **Indirect Costs:** Shared among multiple projects or operations (e.g., HQ rent, utility).
- **Fixed Costs:** Do not change regardless of output (e.g., leased equipment).
- **Variable Costs:** Fluctuate with project activity volume (e.g., consumables).

### Aggregating Costs and Establishing the Baseline

After estimating costs for each activity or work package, aggregate them into control accounts, then further to the project or phase level. Add contingency reserves for identified risks to create the cost baseline.

> **Key Term: Contingency Reserve**
> Budget within the cost baseline allocated for known risks with active response strategies.

The cost baseline plus any management reserve constitutes the total project budget.

### Resource Planning: Human and Physical Resources

Projects use both team (human) and physical resources. Plan how many and what type of resources are needed, their availability, duration, and timing. Tools for resource planning and allocation include resource breakdown structures (RBS), resource histograms, and calendars.

> **Key Term: Resource Breakdown Structure (RBS)**
> A hierarchical chart detailing all resources required by category and type for project delivery.
>
> **Key Term: Resource Histogram**
> A bar chart displaying the allocation and usage of resources over time to identify peaks and valleys in demand.

### Team Resource Allocation and Structures

- **Dedicated Teams:** Most common in projectized and agile environments—team members work solely on one project.
- **Part-time/Matrix Teams:** Common in matrix organizations—resources are shared across projects or functional operations.
- **Virtual Teams:** Geographically separated, requiring careful communication and technological support.
- **Pre-assigned or Procured Resources:** Some resources may be specified or committed before planning is finalized.

### Developing the Resource Management Plan

The resource management plan should detail:

- Roles and responsibilities for human and physical resources.
- Acquisition strategies (internal assignment, external procurement).
- Training, recognition, and development plans for project staff.
- Release criteria and timing for freeing resources at project completion.

### Resource Smoothing and Leveling

Balance resource supply and project demand:

- **Resource Leveling:** Adjusts the schedule to address overallocation by extending the duration.
- **Resource Smoothing:** Limits adjustments within project float so end dates are not delayed.

> **Key Term: Resource Leveling**
> Adjusting activity dates to resolve resource conflicts and constraints, potentially extending project duration.
>
> **Key Term: Resource Smoothing**
> Modifying activity schedules within float to optimize resource usage without affecting critical path dates.

### Budget Performance Monitoring with Earned Value Management (EVM)

Earned value management is a comprehensive method to measure schedule and cost performance against the baselines.

Key EVM formulas:

- **Cost Variance (CV):** CV = EV – AC (Negative = over budget)
- **Schedule Variance (SV):** SV = EV – PV (Negative = behind schedule)
- **Cost Performance Index (CPI):** CPI = EV / AC (less than 1.0 = over budget)
- **Schedule Performance Index (SPI):** SPI = EV / PV (less than 1.0 = behind schedule)

> **Key Term: Earned Value Management (EVM)**
> A methodology that combines scope, schedule, and resource measurements to assess project performance and progress.
>
> **Key Term: Cost Performance Index (CPI)**
> The ratio of earned value to actual cost, indicating cost efficiency on a project.
>
> **Key Term: Schedule Performance Index (SPI)**
> The ratio of earned value to planned value, reflecting schedule adherence.

### Controlling Budget and Resource Variance

Regularly compare project performance with the cost baseline and resource plan. Take corrective or preventive action if there are significant variances. All changes to the baselines should follow the integrated change control process and use the project’s change control system.

> **Key Term: Integrated Change Control**
> The process of reviewing, approving, or rejecting changes to the project baselines and management plans.

### Resource Control and Release

When activities or phases are completed, release resources (human or physical) as soon as feasible, following the resource management plan. Early release reduces unnecessary costs and allows redeployment elsewhere in the organization.

### Budget and Resource Planning in Agile and Predictive Projects

In predictive environments, detailed upfront planning is typical, with rolling wave planning as information emerges. In agile, budgets and full team resources are usually fixed, and scope is adjusted through frequent backlog reprioritization. Progress is tracked using team velocity and burn charts.

> **Key Term: Team Velocity**
> A measure of work completed during a cycle, used to forecast remaining work and delivery dates in agile projects.
>
> **Key Term: Burn Chart (Burndown/Burnup)**
> Visual chart showing remaining or completed work over time to monitor progress toward project goals.

### **Worked Example 1.1**

A project team is building a new office block. The cost baseline, including all identified risk reserves, totals \$2,500,000. During month four, the earned value (EV) is \$800,000, while actual costs (AC) are \$950,000. The planned value (PV) at this point is \$1,000,000.

- a) What is the cost performance index (CPI)?
- b) What is the schedule performance index (SPI)?
- c) What do these values mean?

> **Answer:**  
> a) CPI = EV / AC = \$800,000 / \$950,000 ≈ 0.84  
> b) SPI = EV / PV = \$800,000 / \$1,000,000 = 0.8  
> c) CPI below 1.0 means the project is over budget; SPI below 1.0 means the project is behind schedule.

### **Worked Example 1.2**

An agile team delivers a project over eight two-week cycles. The team’s average velocity is 24 story points per cycle. There are 72 story points left in the backlog.

- a) How many cycles are required to complete the backlog?
- b) If a new resource joins, increasing the velocity to 36, how does this affect the forecast?

> **Answer:**  
> a) 72 / 24 = 3 cycles  
> b) 72 / 36 = 2 cycles (if velocity increases and sustains)

### **Exam Warning**

> Avoid confusing contingency reserves (included in the cost baseline for known risks) and management reserves (held outside the cost baseline for unknown risks, released only with management approval). Reporting budget performance against the wrong value is a common exam error.

### **Revision Tip**

> Review the main EVM formulas and practice interpreting CPI/SPI values. Know which risks and resource needs are addressed by contingency vs. management reserves.

## **Summary**

Project budget and resource planning is critical to successful delivery and control. Accurate cost estimation, aggregation, and baselining provide the basis for performance monitoring. Resource planning considers both human and physical needs, balanced for constraints and availability. Earned value management gives a powerful set of tools for tracking performance and forecasting outcomes. In all cases, project changes impacting baseline cost or resource plans must follow a rigorous review and approval process.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- Accurate cost estimating and aggregation form the basis of a reliable project budget.
- Project costs are categorized as direct, indirect, fixed, or variable to aid management and reporting.
- The cost baseline plus management reserves sets the overall project budget.
- Resource plans must account for demand, acquisition, allocation, smoothing, and leveling.
- Resource and budget performance are monitored using earned value management (EVM).
- CPI and SPI < 1.0 indicate cost or schedule overruns.
- All changes to baselines follow integrated change control procedures.
- Agile projects use fixed budgets and team velocity to forecast, with remaining work allocated through backlog reprioritization.

## **Key Terms and Concepts**

- Cost Baseline
- Analogous Estimating
- Parametric Estimating
- Three-Point Estimating
- Contingency Reserve
- Resource Breakdown Structure (RBS)
- Resource Histogram
- Resource Leveling
- Resource Smoothing
- Earned Value Management (EVM)
- Cost Performance Index (CPI)
- Schedule Performance Index (SPI)
- Integrated Change Control
- Team Velocity
- Burn Chart (Burndown/Burnup)


Project planning - Planning and managing budget and resources