One of the most important aspects of project management is to keep costs within the limits set by the project budget. But even seasoned project managers sometimes can’t help but wonder: how to ensure effective project cost management?
This difficult balancing act between allocating resources and making sure cost control is in check must be one of the central issues tackled by the project team from the project planning phase and onwards.
Keep reading to learn more about what cost management is, how your project can benefit from effective cost planning and the steps and tools to manage costs effectively.
What is project cost management?
Project cost management is the process of establishing an estimation of the resources needed to complete the project, planning cost budgeting and managing expenses throughout the life cycle of the project to keep total costs within set limits.
Cost management is essential in project management. Regardless of your activity or the area of the project, project success can be measured with the 4 questions listed below:
- Do deliverables cover the scope of the project and comply with its requirements?
- Does it fulfil quality standards?
- Was it completed within the schedule set for the project?
- Was it completed within the budget allocated to the project?
As long as the project manager can’t guarantee a positive answer to these 4 questions, the project cannot be deemed a complete success.
How can your projects benefit from careful cost management?
There are many reasons why managing costs is considered an essential part of project management. The project budget has considerable influence over project goals and key decisions throughout its life cycle.
It will determine whether the other 3 objectives are reachable (scope, delays, quality). If the costs incurred by the project aren’t consistent with these objectives, the deliverables will likely fail to fulfil the expectations of the client, by either overachieving or underperforming.
Cost control generates a few of the important metrics (also called Key Performance Indicators or KPIs) to track to measure project performance and progress, making communication with stakeholders easier and ensuring you’re going in the right direction.
Overall, project cost management lets you:
- Make sure stakeholders and the project sponsor understand and agree on key requirements and quality standards,
- Keep an eye on project progress in real-time for better decision-making and cost overrun forecasts,
- Communicate clearly with stakeholders about project progress, ensuring the project is in line with their expectations,
- Track KPIs such as the Return on Investment (ROI) to measure and record the success of your decisions for future projects.
Is project cost management easy?
Cost management can pose quite a few challenges, and can even be a daunting task in large projects. As essential as it may be for your project to unfold smoothly, getting it right can be tricky.
The project manager is the one responsible for cost management every step of the way. They need to have sufficient knowledge of the risks and scope of the project and use adapted tools. Failure to do so might result in some of the most common issues associated with poor cost management, including:
- Inaccurate cost estimation: if the project manager is unable to fully assess the expenses needed to complete the project, or if information is lacking for a specific project, they might come up with inaccurate estimates. This means additional costs might be incurred to complete the project.
- Poor cost control: if the project manager doesn’t keep track of expenses in real-time, or if they don’t adopt a proactive approach to risk management, project development might run into obstacles, causing delays or worse, the abandonment of the project altogether.
Accuracy and tracking are two of the most important challenges for effective cost management. Hence why project managers must follow the right steps and be equipped with the right tools to carry out their role properly.
How to implement cost management in your project
Cost management is a continuous process that must be baked into the entire life cycle of the project. Budgets and estimates are to be revised regularly with thorough cost control to better reflect the current and future needs of the project.
There are 4 steps to building a cost management plan: resource planning, cost estimation, budgeting and control. In the event changes happen over the course of the project, it might be necessary to go back to a previous step and start the cycle over.
1. Resource planning
This step is an integral part of project planning and must be carried out before project development begins. In resource planning, the goal is to establish a comprehensive outline of all the resources necessary to complete the project.
The nature of these assets can be diverse: they encompass human resources (employees, team members, consultants...) as well as physical resources (material, equipment, cash…).
In order for this inventory to be as complete as possible, you might need to break down the project into smaller chunks: design the Work Breakdown Structure (WBS) to determine which tasks would be required to complete, who could take care of them using which tools and resources.
To ensure nothing is missing, be sure to foster collaboration: ask team members and other stakeholders about their opinion, look at historical data and similar projects, and be sure to keep in touch with realities on the ground (including seasonality, time constraints…).
2. Cost estimation
Once all resources have been listed, you must estimate their cost. The goal is to be as accurate as possible, as some inaccuracies may easily snowball into more serious issues to deal with down the road.
To calculate the cost of resources, you should take into account:
- Their price (wages and hiring costs, base costs, shipping and handling costs…)
- The prerequisites to obtain or use the resource, if any
- The length of time during which you will need the resource to be available
- Assumptions and the risks associated with the resource
There are many ways to estimate costs. You could either:
- Add the individual cost of each resource or task to compute the total cost of the project. This bottom-up approach is the way to go if you have no way of comparing your project to others.
- Start with a global estimation and divide the total between tasks according to their degree of importance or required spending. This top-down method works best if you’ve already conducted similar projects in the past.
This step will probably be the most time-consuming in the cost management process, especially if you don’t have access to reliable data. But taking your time is key, considering inaccuracies will almost always lead to delays and further expenses and undermine the trust stakeholders have placed in the contract.
Estimating costs is essential, but the figure alone remains meaningless if it is not properly integrated into the life cycle of the project. This step aims at describing cash flows during the project, meaning what resources will be allocated to which tasks and when.
This helps the organization make sure sufficient assets are available when required, in order not to impede project progress. It guarantees that cash, equipment and team members will be able to perform their tasks in due time and that time and money don’t go to waste along the way.
A solid project budget can also be used as a tracking tool. Project managers can use it to estimate how much value was created at each stage of the project and plan ahead to ensure the project won’t run out of resources.
4. Cost control
With cost estimates and the project budget ready, you can easily track the progress of your project and ensure it goes according to the cost management plan. You can estimate whether or not your project will stay within budget and create value by using methods such as Earned Value Management (EVM).
This approach uses 3 variables associated with each task to measure performance:
- Planned Value (PV): the projected contribution of each task to the overall project
- Earned Value (EV): the value actually created by the task
- Actual Cost (AC): the costs associated with the task that you’ve incurred so far
PV and EV can be multiplied by the scheduled or actual completion rate of the task for real-time tracking. Comparing these indicators can help you determine whether or not you’re falling behind in terms of the value created by your project so far.
The best tools for project cost management
Innovative software solutions can help you keep track of your project and compare its actual progress to your initial estimates. They make reporting and planning easier, meaning you can spend more time working with your teams.
- Project Management Software: all-in-one solutions to manage resources, planning and can be used as interactive collaboration platforms.
- ERP Software: Enterprise Resource Planning solutions allow you to centralize your data to manage Human Resources, accounting, invoicing and more in one place.
- Resource Management Software: these tools help you visualize which resources are available in real-time.
- Planning Software: manage complex schedules with ease thanks to these professional solutions.
You are now fully aware of the importance of project cost management. Provided resources and costs are assessed accurately and comprehensively, the project budget can be used as a reliable compass for project managers to keep track of progress.
Stay one step ahead by using enterprise solutions, and your cost overruns will be a relic of the past!