First of all, it is important to understand when studying for the PMP Exam that the terms “budget” and “Cost Baseline” mean the same thing. Determining the budget on your project usually encompasses a couple of different phases. When the Project Charter is initially created in Initiating process group, the sponsor usually includes a budget figure that is used as guideline of how much money it is estimated that you will need on your project to successfully execute it. This is normally a very high-level and inaccurate figure since you don’t really have enough information at the outset of the project to accurately measure how much the project will cost down to the penny. This is your initial Cost Baseline.
As you move from the Initiating Process Group to the Planning Process group, you have defined the specific tasks that need to be performed in order to execute the project. At this point you are able to associate specific costs to the activities in the Work Breakdown structure in the Estimate Costs process. Once you have estimated these costs, you can aggregate them and this becomes your new Cost Baseline (also known as your “budget”). Note that this new budget differs from the budget that was initially created in the Project Charter. It is much more accurate because you are no longer “guestimating” what the costs will be but rather have specific cost information available that you can attach to each project activity.
Budget Forecasts (an output of the Control Costs process) are created using EVM (Earned Value Management) and help to predict how the budget will need to change over the future course of the project. By using EVM, you are able to determine how the project has performed as compared to the current Cost Baseline, and if adjustments need to be made. You may be on budget, under budget or over budget at any specific time on a project and EVM is used to help you make decisions on any changes that need to be made to the project’s budget in order to ensure its success. And also keep in mind that in terms of the PMP Exam, any of the “Baselines” refer to the original baseline “plus all approved changes”.
Understanding EVM and Variance Analysis are crucial to successfully passing the PMP Exam. In terms of “Budget” or “Cost Baseline” it is important to remember that an initial budget is created at the beginning of the project and it is constantly being updated during the project depending on the expected project progress versus the actual project progress.