What Is A Historic Cost Baseline In Procurement?
Have you ever wondered how procurement professionals determine the cost of a project and monitor its progress? They use a Historic Cost Baseline! The term may sound complex, but it’s actually quite simple. In this blog post, we’ll dive into what exactly is a historic cost baseline in procurement and why it’s crucial for successful project management. So, let’s get started and unravel the mystery behind this fundamental concept!
What is a Historic Cost Baseline?
A historic cost baseline is a time-phased budget that captures the approved costs of all work to be performed on a project. It is used to control and monitor project spending. The baseline is established early in the project planning process and is updated as the project progresses and changes are made.
The purpose of the historic cost baseline is to provide a point of comparison for actual costs incurred during the execution of the project. By comparing actual costs to the baseline, variances can be identified and corrective action can be taken to ensure that the project stays within its budget.
The historic cost baseline is one of the tools used by project managers to control and monitor project spending. It provides a point of comparison for actual costs against which variances can be identified and corrective action taken.
How is a Historic Cost Baseline Used in Procurement?
The historic cost baseline is used to determine the most probable cost of completing a project, based on past experience. This information is then used to negotiate prices with vendors and to make decisions about changes to the project scope. The baseline can also be used to track actual costs against the original estimates, to identify areas of potential cost overruns.
Pros and Cons of Using a Historic Cost Baseline
There are pros and cons to using a historic cost baseline in procurement. On the pro side, a historic cost baseline can provide a good starting point for negotiations and can be used to track cost overruns. On the con side, a historic cost baseline may not be representative of current costs and may not take into account future inflation.
Alternatives to Using a Historic Cost Baseline
There are several alternatives to using a historic cost baseline in procurement. One is to use a parametric estimate, which uses mathematical models to estimate the costs of future projects based on past projects. This approach is often used for large, complex projects where there is a lot of data available. Another option is to use an activity-based costing (ABC) model, which estimates costs based on the activities involved in a project. This approach is often used for projects that are not well understood or that have a lot of variability. Finally, you can use a bottom-up estimating approach, which starts with estimating the cost of individual components and then aggregating those estimates to get the total project cost. This approach is often used when there is little data available or when there is a lot of uncertainty about the project.
Conclusion
A historic cost baseline in procurement is a critical tool for tracking and managing the cost of materials and services throughout a project. By comparing current costs to past costs, organizations can ensure that their resources are being used efficiently and effectively. Understanding how to use a historic cost baseline in procurement can be an invaluable asset for any organization looking to reduce costs and improve operational efficiency.