01 · Purpose
Why and when to use it
Why?
It allows the sponsor to judge affordability and gives the team a basis for managing expenditure and changes.
When?
Create an initial budget in Define and revise it as the measurement and implementation approach becomes clearer.
Who takes part? The leader gathers estimates; resource owners and finance check them; the authorised sponsor approves spending.
02 · Application
How to apply it
Start with: Work packages, resource estimates, rates, supplier quotes, uncertainty and organisational accounting rules.
- Estimate cost by work package or resource category.
- Distinguish internal effort, incremental cash spending and recurring costs.
- Record quantities, rates, assumptions and estimate uncertainty.
- Identify contingency for recognised uncertainty and approval rules for its use.
- Agree the baseline budget and purchasing authority.
- Track actual costs plus remaining commitments and forecast cost at completion.
03 · Example
A warehouse dispatch project
Original illustrative example. All quantities, targets, roles and timings below are fictional teaching assumptions, not findings from a real project.
| Cost item | Basis | Estimate |
|---|---|---|
| Internal project effort | 80 hours × €35/hour | €2,800 internal resource value. |
| Temporary test materials | Quoted purchase | €600 incremental cash. |
| External calibration | Quoted service | €400 incremental cash. |
| Contingency | Allowance for identified test uncertainty | €200 incremental cash. |
| Total | Resource view; cash shown separately | €4,000 resource budget; €1,200 incremental cash budget. |
04 · Interpretation
What the result tells you
An organisation may track internal effort as a project cost even when payroll does not change. Keep that resource view separate from cash requirements. Check remaining purchase commitments before declaring the project under budget.
Completion check: An approved cost baseline with estimate assumptions, cash requirements, contingency and spending authority.
05 · Judgement
Mistakes and limitations
Common mistakes
- Ignoring internal capacity because it is not an extra payment.
- Adding a generic contingency percentage without identifying uncertainty.
- Comparing actual spending with the budget while ignoring outstanding orders.
Limits of the tool
Initial estimates may change substantially before solutions are selected. Record their confidence and review them after major decisions; follow local finance rules rather than treating this example as an accounting standard.
07 · Reading
Sources and further reading
Toolset backbone: Six Sigma+Lean Toolset: Mindset for Successful Implementation of Improvement Projects, second edition, edited by Stephan Lunau, with Renata Meran, Alexander John, Olin Roenpage and Christian Staudter (Springer, 2013). This reference identifies the toolset; the book text was not available for a chapter-level comparison in this development pass. The explanations, application sequence and fictional examples here are original LeanTrainingLab teaching material. Linked readings provide background; they do not prescribe every example or target.