# The meaning of & Calculating Project Budget

I'm very new to the whole Project Management world, so this question may be at the beginners level, anywho:

What is the Budget Cost compared to the full Cost of the Project?, based on the research I have gathered that Budget Cost is the project financial allocations or estimates the project is expected to meet; so am I being told here that the Project Budget is what the Project Manager sets up at the beginning of the project to calculate how much of the full actual of the project price will actually be needed to completion of the project?, if so doesn't this seem a bit close to the EAC (Estimate At Completion) definition? as they are both being estimated..

Moving on, the way that Budget cost is calculated is as follows:

``````Budget = Opportunity  Value (\$) – Contingency  Value (\$) – Value Pricing (\$)
``````

Now I have no idea what that means, as in What is a Contingency Value and Value Pricing?, I'm guessing that Opportunity Value is in fact the project cost..

All in all, I really would like to understand what Budget Cost actually means compared to EAC and the Opportunity Cost for example and who is responsible for calculating it?

• Several people have asked for a source for that unusual formula. Can you provide a citation?
– MCW
Commented Jun 21, 2013 at 16:12

All in all, I really would like to understand what Budget Cost actually means compared to EAC and the Opportunity Cost for example and who is responsible for calculating it?

Budget Cost is essentially the estimate of total project costs at the start of the project. Since this is an estimate it can (likely will) be somewhat different than the Cost of the Project which is the final balance of payments you have at project close-out

This doesn't necessarily apply to a firm-fixed price contract where you are the customer. In those types of contract the supplier takes on the financial risk, so from the customers perspective Budget Cost = Cost of the Project.

EAC is a revised estimate that is generated at some time(s) during the project. The further you are into your project the more likely it is that your EAC will diverge from the original Budget Cost, but becomes more likely to be a better representation of the Cost of the Project.

Example: My project is to renovate my kitchen. I have a Budget Cost of \$10,000 based on research and I decide to try to do it myself. Partway through the project my EAC is \$11,000 because of unanticipated wastage of mterials. At the end of the project I total the bills and the Cost of the Project was \$10,875.

All parties involved in a customer/supplier relationship should be estimating budget and deciding if there is a valid business argument for continuing with the project. The catch is that (a) you may not have as good an idea of what costs are likely to be as your partners, and (b) all parties need to be convinced that the project adds value for money.

For your equation I'm not 100% sure but maybe you are looking at it the wrong way. Is it really more along the lines of establishing a cut-off for a max value of your project? In other words it might be saying "My project budget should no more than the dollar value of the opportunity less any buffers to address contingencies less the cost to complete the project".

• Thanks for that, the example and explanation is exactly what I needed. Commented Jun 24, 2013 at 1:35

I have never seen that particular formula to describe the budget. In the U.S., the Defense Acquisition University published the "Gold Card" to describe the various dollars of budget for Earned Value Management. Essentially, these are the components that make a contract price:

Your Performance Management Baseline (PMB) consists of the costs required to perform against your work packages and planning packages. Your management reserves are dollars that sit outside of your PMB but are part of your project costs. Depending on the seller / buyer arrangement, the management reserves could be part of the contract cost value, i.e., the seller of services holds the dollars, or outside the contract cost value, i.e., the buyer of services holds the dollars, or both.

The PMB and MR are your project costs and is your negotiated contract cost (NCC).

On top of this value, you have your authorized but unpriced work (AUW). So your NCC + AUW is your contract budget base (CBB). On top of CBB is any project overruns that have been accrued, which becomes your Total Allocated Budget (TAB). So your TAB is what you are expecting your project to cost you.

If this project is a seller / buyer arrangement, then you need to add profit and fees to the TAB, which results in your Contract Price or Total Contract Value.

So you have: PMB + MR = NCC + AUW + Overruns = TAB + Profit = Contract Price or Total Contract Value.