MGTS7527 Chap.7 Cost Estimates, Budgets and Earned Value
Cost Estimates, Budgets and Earned Value
Spending deliberately, not just spending less
The cost part of Week 4 frames project finance as estimating, securing, allocating, monitoring and forecasting the money needed to deliver value.
It helps decide whether an approach is affordable, what a change or recovery would cost, whether spending follows the plan, what the final cost is likely to be, and whether continued spending is still justified.
Layers that must stay separate
A cost estimate is not a budget, and the cost baseline is not necessarily the whole project budget.
Work-package estimates are aggregated, contingency is added for identified risks to form the cost baseline, and a governed management reserve sits outside it.
This chapter builds those layers for an original grandstand refurbishment, then covers direct, indirect, fixed and variable costs and the four estimating techniques: analogous, parametric, bottom-up and three-point.
Reading earned value
Planned value, earned value and actual cost combine scope, schedule and cost in one picture.
Comparing earned value with planned value shows schedule progress; comparing it with actual cost shows cost efficiency.
The chapter interprets a four-month status for the grandstand and closes with the practical financial control questions from Week 6.
Cost in the Team Project Plan
The plan brief asks for a planning-level estimate within the approved budget, with its basis, assumptions and a justified contingency.
This chapter's layers give that section its structure: estimate the work packages, link contingency to identified risks, keep management reserve separate, and explain any movement between cost categories.
What this chapter covers
- 01
Why project finance matters
- 02
Cost estimate, budget and cost baseline
- 03
Contingency reserve and management reserve
- 04
Direct, indirect, fixed and variable costs
- 05
Analogous, parametric, bottom-up and three-point estimates
- 06
Building an approved budget
- 07
Planned value, earned value and actual cost
- 08
Practical financial monitoring
Worked example · free
Build a grandstand budget from work packages, contingency and reserve
- 1Aggregate the packages: 40 + 150 + 90 + 60 + 30 = $370k.
- 1Add contingency for identified risks: $370k + $35k = $405k, the cost baseline.
- 1Add management reserve outside the baseline: $405k + $25k = $430k, the project budget.
- 1Contingency is drawn against identified risks; management reserve is released only through governance.
Key terms
- Cost Baseline
- The approved budget, spread across the schedule, against which cost performance is judged.
- Contingency Reserve
- Money or time set aside for risks that have been identified and given a planned response.
- Management Reserve
- Budget held outside the cost baseline for unforeseen work and released through governance.
- Bottom-Up Estimate
- An estimate built from lower-level work packages and added upward.
- Earned Value
- The budgeted value of the work actually completed by the status date.
- Planned Value
- The budgeted value of whatever work the plan said would be done by the status date.
Cost Estimates, Budgets and Earned Value FAQ
Is the cost baseline the same as the project budget?
Not necessarily. The cost baseline includes the work estimates and contingency for identified risks; the project budget can also include management reserve held outside the baseline for unforeseen work, which is released only through governance.
When should I use a three-point estimate?
When the uncertainty itself matters. Optimistic, most likely and pessimistic values make the range visible instead of hiding it behind one number, and the gap between them shows where contingency may be needed. The estimate is only as good as its inputs.
How do I read earned value without formulas?
Make two comparisons. If earned value is below planned value, less work is done than planned, so the project is behind. If actual cost is above earned value, the completed work cost more than its budgeted value, so cost performance is unfavourable.
What makes a contingency defensible in a project plan?
A link to specific identified risks and their planned responses, plus a stated basis for its size. A contingency with no connection to the risk register, or reserve hidden inside every activity estimate, is hard to justify to a sponsor.
Assessment move
Set out a budget build-up for any small project in four lines, estimate, contingency, baseline and reserve, and say who controls each line. Then write three status snapshots of planned value, earned value and actual cost and interpret both comparisons for each in one sentence.
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