Use a cost buffer if your business is project-cost sensitive. Organizations using throughput accounting and internal projects (e.g., internally funded R&D) may not require a cost buffer.
Sizing the cost buffer requires considering a number of factors. First, you should budget for the use of the schedule buffers. While start delays will not directly translate to cost, additional activity-duration times used by people working to complete the activity will increase cost. You should include at least 50% of time buffers into the cost buffer at an appropriate cost rate related to the chain that they protect. Alternatively, you could sum the amounts removed using one of the buffer-sizing methods you used for time, such as bias plus SSQ (i.e., the cost buffer equals the square root of the sum of the squares of the cost removed from each project activity, plus a fixed amount for bias). Note that this method is subject to the same considerations that applied when using the sum of the squares to size time buffers (e.g., for many nearly equal cost activities, this method may yield a much smaller buffer).
Second, you must consider the unique aspects of each project that affect your ability to estimate accurately. For example, if you are estimating unique materials or materials subject to wide price variations, you should consider this when sizing the cost buffer.
Finally, you should take advantage of using an aggregated cost buffer. This substantially reduces the total cost buffer requirement. It also reduces the tendency to "use it or lose it," which sets in if you include cost contingency in each activity. As with schedules, because of human behavior, projects do include cost contingency. The only question is if you have a readily identified, aggregated contingency under the control of the project manager or hidden contingency at the discretion of each task performer.
Never attempt to operate with a cost buffer of less than 10% of the estimated project cost. The reason is that there is always some bias in project cost estimates. You can always forget some things and underestimate others. Project reviews will usually remove any additional "unneeded" items in the cost estimate and make sure that individual cost estimates are not unrealistically high.
The buffer size for fluctuations should consider that you will rarely get the advantage of work-package underruns (estimated at their average durations), but you should consider the statistical combination of the positive variances. If you have a dominant work package in terms of total project cost and uncertainty, the uncertainty in that work package should size the statistical part of your cost buffer. If your work packages are similar in size, and you have several of them, you can use the square root of the sum of the squares to size the statistical contribution to the cost buffer.
If your customer is dissatisfied with the size of the cost buffer, you might consider rolling-wave planning. This method phases the plan, with a higher level of detail and lower level of uncertainty associated with near-term, better-known tasks and less detail and more uncertainty for later phases of the project. The rolling-wave method adds detail to the plan periodically as it is better defined.
If your organization uses cost-and-schedule-control reporting or uses project plans to sum up organizational resource demands, you can add the cost buffer into the project plan. We recommend you put it all into the project buffer. If you use other means for global resource planning, you can put it into the buffer as a leveled fixed cost. If you use the individual project plans to project resource demand, you must put in a resource distribution representative of the aggregated project. For example, divide up the people resources to represent the same percentage in the buffer as they do in the plan.
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What you need to know about… Project Management Made Easy! Project management consists of more than just a large building project and can encompass small projects as well. No matter what the size of your project, you need to have some sort of project management. How you manage your project has everything to do with its outcome.