GSOE9820 · Engineering Project Management
Cost, Budgeting, Reserves and Procurement
This chapter builds the cost knowledge area for the Task 2 PMP: estimating costs, aggregating them into a cost baseline, and — the rubric point the course grades explicitly — distinguishing contingency reserve from management reserve. It also covers estimating techniques and procurement of subcontracted scope, and the budget must integrate with the schedule and risk register, which is where marks (and quiz questions on reserve types) concentrate.
What this chapter covers
- 01Estimate Costs: approximating the cost of resources for each activity
- 02Estimating techniques: analogous (top-down), parametric, bottom-up (most accurate), three-point/PERT
- 03Three-point (PERT) estimate: E = (O + 4M + P)/6; σ = (P − O)/6
- 04Cost aggregation: activity → work package → control account → cost baseline → budget
- 05Cost baseline = sum of work-package costs + contingency reserve
- 06Budget = cost baseline + management reserve
- 07Contingency reserve (known/identified risks, inside the baseline, PM-controlled) vs management reserve (unknown risks, outside the baseline, sponsor-released)
- 08Procurement of subcontracted scope and the budget summary table that ties the PMP together
Build a budget with contingency and management reserve
- +1Start from the aggregated work-package cost: $420,000. This is the cost of the planned work before any reserves.
- +1Add the contingency reserve to get the cost baseline. Contingency covers identified ("known-unknown") risks and sits inside the baseline: cost baseline = 420,000 + 42,000 = $462,000.
- +1Add the management reserve to get the total budget. Management reserve covers unforeseen ("unknown-unknown") work and sits outside the cost baseline: budget = 462,000 + 46,000 = $508,000.
- +1Say who controls what. The PM controls the contingency reserve and can draw on it when an identified risk triggers, without further approval; the management reserve is held outside the baseline and is released only by management/the sponsor. Integration check: each contingency dollar should trace to a specific risk in the register.
Key terms
- Cost baseline
- The approved, time-phased budget against which cost performance is measured. It equals the sum of work-package cost estimates plus the contingency reserve; it excludes the management reserve.
- Contingency reserve
- Budget set aside for identified ("known-unknown") risks in the register. It is part of the cost baseline and controlled by the project manager, who can draw on it when a registered risk triggers.
- Management reserve
- Budget set aside for unforeseen ("unknown-unknown") work. It sits outside the cost baseline and is released by management/the sponsor, not the PM; using it usually changes the cost baseline.
- Bottom-up estimate
- Costing each activity or work package and summing upward — the most accurate estimating technique but the most effort. Contrast analogous (top-down from similar projects) and parametric (a statistical rate).
- Three-point (PERT) estimate
- A weighted estimate E = (O + 4M + P)/6 from optimistic, most-likely and pessimistic values, with activity standard deviation σ = (P − O)/6, used to account for estimating uncertainty.
- Procurement
- Acquiring subcontracted scope from outside the team via contracts. In predictive engineering projects, large well-specified chunks are often subcontracted through specifications, and their cost must be captured in the budget.
Cost, Budgeting, Reserves and Procurement FAQ
What is the difference between contingency reserve and management reserve?
Contingency reserve funds identified (known-unknown) risks listed in the register, sits inside the cost baseline, and is controlled by the project manager. Management reserve funds unforeseen (unknown-unknown) work, sits outside the cost baseline, and is released only by management or the sponsor. The cost baseline includes contingency; the total budget adds management reserve on top. This distinction is explicitly graded and a common quiz item.
How do the cost baseline and budget relate?
Aggregate the activity/work-package estimates, add the contingency reserve → that is the cost baseline (what you measure performance against, and what Earned Value's BAC refers to). Add the management reserve to the cost baseline → that is the total project budget. So budget ≥ cost baseline, with the gap being the management reserve.
Which estimating technique should I use?
It depends on the information you have. Analogous (top-down from similar past projects) is quick but rough and used early; parametric applies a statistical rate (e.g. cost per unit); bottom-up sums activity estimates and is the most accurate but most effort; three-point/PERT (E = (O + 4M + P)/6) accounts for uncertainty. The PMP typically uses bottom-up for the baseline, with three-point where uncertainty is high.
How is cost assessed in GSOE9820?
As the cost knowledge area in the Task 2 PMP: a budget summary table with the cost baseline, contingency reserve and management reserve clearly separated, tied to the risk register (contingency lines trace to specific risks) and consistent with the schedule. Reserve types and the baseline-vs-budget relationship are also examinable in the final Knowledge Quiz.
Exam move
Make the reserve distinction bulletproof, because it is both a graded PMP item and a favourite quiz question: contingency reserve = identified risks, inside the cost baseline, PM-controlled; management reserve = unknown risks, outside the baseline, sponsor-released. Practise the aggregation chain end to end — activity estimates → work-package costs → cost baseline (add contingency) → budget (add management reserve) — with fresh numbers, and be able to say who can spend each reserve. Drill the three-point formula E = (O + 4M + P)/6 and σ = (P − O)/6 for uncertain activities, and know when analogous, parametric and bottom-up estimating each apply. For the PMP, integrate: trace each contingency line to a named risk in the register, and make sure the budget is consistent with the schedule durations that drive it. Keep a one-page budget summary template (baseline, contingency, management reserve) you can reproduce under time pressure. Ask Sia to give you a work-package cost list and check your baseline, budget and reserve reasoning.
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