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PMP lesson · Cost & EVM · Cost: estimating, budget and earned value · lesson 2 of 5 · about 7 minutes

Cost baseline, budget and reserves

Predictive · hybrid programmesFree preview
Goal: After this lesson you can build a cost baseline and a project budget from estimates and reserves, and say who may use each reserve.

1The situation

Where did the $20,000 go?

The robot cell estimates add up to $90,000. You add $8,000 for known risks (late guarding, vision rework) and the company keeps another $5,000 aside for surprises.

Halfway through, a flood closes the site road for a week, something nobody predicted. Can you simply use the $5,000?

The answer depends on which reserve the money belongs to. The exam tests this difference all the time.

2Two reserves, two owners

Reserves are money for uncertainty. There are two kinds:

Contingency
Known-unknowns
For identified risks in the risk register. Inside the cost baseline.
PM / risk owner uses it when a planned risk occurs
Management
Unknown-unknowns
For unforeseen events. Outside the cost baseline.
Needs approval through change control
Planned risk occurs → contingency reserve. Surprise nobody identified → management reserve, with approval.

3See it in one picture

Activity cost estimates → work packages + Contingency reserve (known risks) + Management reserve (unknown risks) COST BASELINEPM controls itEV is measured on it PROJECTBUDGET Management reserve is outside the baseline: using it needs approval (change control)
The cost baseline sits inside the project budget; management reserve sits on top of it.

4How it looks on the exam

Exam-style question 1. Activity estimates total $450,000. The contingency reserve is $40,000, and management reserve is $25,000. What is the cost baseline?
A. $450,000
B. $490,000
C. $515,000
D. $475,000
Show the answer and the decode
Answer: B.
In simple English
Estimates plus two kinds of reserve.
What is the question really asking?
The cost baseline.
Key words / trigger
“contingency reserve … management reserve”
PMP logic
Cost baseline = estimates + contingency = $490,000. Management reserve is outside it.
Why the wrong answer looks attractive
$515,000 is the project budget, which also includes management reserve.

5Remember this

Your memory card

  • Cost baseline = estimates + contingency reserve (PM controls; BAC)
  • Project budget = cost baseline + management reserve
  • Contingency = identified risks · Management = unforeseen, needs approval
  • Funding short in a period → funding limit reconciliation using float
The full lesson in the PMCLEAR app also has:
  • the rest of the lesson (Building the numbers, Funding vs spending)
  • a worked example
  • the common traps (wrong vs right)
  • 2 exam-style questions with the decode
  • a 3-question quick check
  • an interactive calculator
Open the full lesson → Create a free account
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