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Good internal control requires direct tracing of all overhead costs to the project benefitting from the use of the overhead item, if possible. However, many organizations use only a few overhead cost pools (sometimes called buckets) that are basically general ledger accounts where costs of a particular type are aggregated. Then the organization uses simple allocation methods based on common drivers (allocation bases), such as total materials costs or total labor hours or total labor costs, to allocate overhead amounts. Typically, there are weak cause-effect relationships between the accumulation of costs in the pool, the assumed dependent variable (the item caused by the driver) and changes in the driver (the assumed independent variable) whose increase causes the overhead cost pool to increase.

Typically, overhead costs and driver quantity are estimated prior to the start of an organization’s fiscal year for each overhead pool. Then, an overhead rate [(estimated cost)/(estimated driver quantity)] is computed and used to allocate pool costs to “users” of the cost pool. For example, if the estimated annual costs for a particular overhead pool (overhead account) are $832,000 and the driver is direct labor hours of 208,000, every direct labor hour incurred on a project would be allocated $4.00 of overhead from this pool.28

A PM should seek to find out everything possible about the organization’s overhead allocation process so they can be in a position to negotiate a lower rate if the project does not utilize the services provided by every overhead pool. While difficult to accomplish, some PMs succeed in negotiating a lower overhead rate.

Regardless of how costs are allocated to the project, we now return to the question of how the total project budget should be allocated to project tasks. The remainder of this topic is a bit beyond the beginner level we have assumed thus far, but the following discussion could prove extremely beneficial to your organization.

Assigning Total Project Costs to Project Tasks

Materials naturally are linked to the tasks requiring them and material costs, including outsourced work, which can easily be traced to particular tasks. Therefore, material costs normally are treated the same for traditional and CC projects.29

Human resource time (labor), however, is another matter. Logically, if aggressive task times are used and resource time safety moved to a buffer, costs should follow the same pattern. For example, Task A in Fig. 3-3 required 24 days of work by Resource 5. In a CC schedule, Resource 5 would be asked to complete the task, under different operating policies, of course, in 12 days. Ignoring material costs, if we assume that Resource 5 has a fully loaded cost of $50 per hour or $400 per day, $4800 [(12 days) × ($400 resource labor cost per day)] would be assigned to Task A and $2400 (6 days × $400 per day) would be assigned to the project budget buffer,30 analogous to a project buffer of time. While budget buffers might be established for feeding paths as well as for the project, there is little need for such dichotomy between feeding chains (paths) and the Critical Chain when establishing a budget buffer. Therefore, there is a need for only one budget buffer for each project into which half the cost of the safety time removed from all tasks is deposited.

Using traditional product budgeting, Task A would be assigned $9600 for Resource 5 labor, while CC would assign a total of $7200 ($4800 + $2400) to Task A and the project’s budget buffer. The difference in these two amounts ($9600 and $7200), or $2400, would be held at the organizational level as project contingency funds. A PM can freely access funds in the project’s budget buffer, but must petition the organization to access project contingency funds. The budget for other tasks would be handled similarly.

For example, the PM could transfer amounts from the project budget buffer to Task A to cover time overages. If Resource 5 required