High-Performance Budget Management

Change favors the prepared mind.

Sun, Art of War

Every program has a budget and everyone on the team has a budget. Fig. 4.2.5 describes how a program should be planned and executed based on the work scope, time schedule, and budget. Every person at any level of the organization should understand his or her responsibilities and allocation of their budgeted hours for the job they must perform.

A budget, in a broad sense, can be defined as the available resources for the management plans and policies to be used as a guide or blueprint for a given time. In a narrower sense, a budget is the amount of money available for a particular purpose for a definite period of time based on the estimate of expenditure during that period. Budgets can be put into two categories: the direct budget and the indirect budget. Direct budgets are the sum of the budgets allocated to labor, materials, and other direct resources.

Fig. 4.2.6 shows how a contract price is broken down. The following paragraphs describe the various elements shown in this figure.

The Contract Budget Baseline (CBB) is the negotiated contract target cost plus the estimated cost of authorized unpriced work. The CBB increases or decreases only as a result of changes authorized by the customer. The Performance Measurement Baseline (PMB) is a time-phased budget plan against which performance is measured plus the undistributed budget, which is the sum of all control account budgets including indirect budgets. The Undistributed Budget (UB) is the budget for authorized work which has not been distributed to cost accounts yet.

The Management Reserve (MR) is normally between 0% and 20%. The program manager establishes MR levels taken from negotiated contract costs by considering: technical challenges, management challenges, risks, and cost management strategies (e.g., rate changes). MR is not initially distributed to cost accounts and it cannot be used to cover overruns, but it is provided for future known or unknown (in-scope to contract) work (not identified to specific effort). These items are documented in the program budget log by the PC (Program Controller).

The UB is identified with a specific work scope and it is documented in the program budget log. UB is distributed to cost accounts as soon as practical or when the contract has been modified. UB is usually distributed to cost accounts by the end of the accounting month following the month in which the modification is received. Authorized unnegotiated work: The program manager may distribute budgets to Cost Accounts for work that will be performed in the near term, while maintaining the remainder of the estimated cost in UB until a contract modification is received.

For clarity, the UB has the following properties:

1. 1. Confirmed to a specific scope of tasks;
2. 2. Recorded in the project budget log;
3. 3. Assigned to the cost account as soon as possible;
4. 4. Can be related to contract changes;
5. 5. Often assigned to cost accounts at the end of the statistical month, after the changed month is received;
6. 6. Can be related to authorized unconsulted work;
7. 7. The project manager may allocate the budget to the cost account for the work reflected in a similar project, but the remainder of the estimated cost will remain in the UB until the contract change is received.

Note that the program manager may distribute budgets to cost accounts for work that will be performed in the near term, while maintaining the remainder of the estimated cost in UB until a contract modification is received.

Facility Capital Cost of Money (FCCOM) is the imputed interest applicable to the average net asset investment and may also be known as cost of money (COM).

The Cost Account Budget includes activities and resources: labor, subcontract, material, travel, other direct costs (ODC).

The Earned Value Management System (EVMS) measures the value of work performed and it is a project management technique for measuring project performance and progress in an objective manner. Earned value methods include the following attributes:

1. 1. discrete
2. 2. apportioned
3. 3. level of effort
4. 4. progressive planning
5. 5. work packages
6. 6. planning packages

A Work Package (W/P) is the development of control account plans: the cost account budget is broken into smaller work packages, as applicable. A W/P has the same characteristics as the control account: scope of work, milestone completion criteria, single performing organization, and start and end dates.

The Planning Package (Fig. 4.2.6) has the following characteristics:

1. 1. It is a logical aggregation of future work within the Cost Account.
2. 2. It does not provide enough detailed information to plan into work packages.
3. 3. It has scope of work and time-phased budget consistent with schedule start and stop dates.
4. 4. It must be allocated to W/P level prior to work commencing.
5. 5. It must have a control point where cost, schedule, and technical activities are managed.

A Work Package is simply a low-level task or job assignment in the Cost Account, with the following characteristics:

1. 1. It has a single element of cost (e.g., labor).
2. 2. It contains detailed short-span jobs, or material items identified for accomplishing the work scope.
3. 3. It represents units of work at levels where work is performed.
4. 4. Each W/P is clearly distinguished from all others.
5. 5. It is assignable to a single performing organization.
6. 6. Its duration is limited to a relatively short span of time (less than 6 months).
7. 7. It is budgeted/staffed.
8. 8. It has start and end dates.
9. 9. It has a single technique for earning value.
10. 10. It is traceable in the scheduling system.