What Is Cost Management?
Cost management is the process of planning and managing the budget of a business or project. In the case of a project, it helps the project manager estimate what the project will cost and set controls to reduce the chances of the project going over budget.
Cost management is one of the most important responsibilities of a project manager; projects always need resources such as materials, labor and equipment, which generate costs. Those costs must be estimated and controlled throughout the project life cycle to complete the project.
Effective cost management requires the right software. ProjectManager is the perfect tool to track project costs, resources and workload. Our Gantt charts, project calendars and timesheets allow you to manage costs, time and tasks in one place. Get started for free.
How to Manage Project Costs in 4 Steps
The four steps below outline how the cost management process works in project management.
1. Resource Planning
Resource planning is the process of forecasting future resource requirements for a business, project or scope of work. To create a resource plan, you need to start by defining the project scope, a document that details the project activities that will be done.
Once the project activities have been defined, project managers usually rely on historical data, expert opinions, and resource planning tools such as a resource breakdown structure (RBS) to estimate the resources that will be needed.
2. Cost Estimating
Cost estimating consists of assigning costs to the resources you need to execute your projects, such as labor, materials and equipment. Cost estimating is one of the most important steps in the cost management process because it lays out the base for your project budget. There are several cost estimating techniques you can use depending on the characteristics of your project.
3. Cost Budgeting
Based on your cost estimates, you can now create a project budget, which is simply the sum of all your project costs. Make sure to include all types of project costs, including direct, indirect, fixed and variable costs. A project budget should also include contingency reserves in case there’s work that needs to be redone, or a risk has struck the project and risk mitigation strategies need to be taken.
Once the project starts, the project budget is a baseline that’s used to compare actual costs vs. estimated costs. Therefore, project budgets allow project managers to quickly understand if their costs are too high and if there’s a risk of cost overrun.
4. Cost Control
Cost control refers to all the activities, guidelines and procedures taken to minimize and track project costs. Poor cost control can affect the profitability of a project, but luckily project management software can help you to easily keep track of costs with tools such as timesheets, workload planners and project dashboards.
The outputs of these 4 steps can be documented in a cost management plan, a critical component of the project plan.
What Is a Cost Management Plan?
A cost management plan sounds simple. It’s an outline of the cost estimation for the project—but that includes all allocation and how the project manager will control those costs to bring the project in as budgeted.
A cost management plan must take into account the resources that impact the project budget, whether materials or people. There are also fixed, variable and overhead costs. All these must be calculated to know what your financial commitment to the project will be.
Last but not least is the stakeholder, who has a vested interest in keeping costs down. Cost overrun is a problem many projects experience, but not one that stakeholders will tolerate well. Keep the stakeholder in mind when formulating your cost management plan. They need to stay in the loop and get reports throughout the project.
Cost Management Plan Outline
Here are some key elements that must be included in a cost management plan:
- Estimation Methods: Explain which cost estimation method was employed, such as parametric, bottom-up, three-point, etc.
- Units of Measure: To measure costs accurately, it’s important to establish units of measure for your labor, materials and equipment. Some examples of measurement units can be staff hours, square feet, tons, kilograms, etc.
- Cost Baseline: Based on your cost estimates, you must define a cost baseline that marks the spending limit for your project.
- Cost Control Thresholds: Establishing thresholds to monitor cost performance is important. This simply means that when cost variation reaches a certain percentage, the project team will take cost management actions.
- Performance Measurement Methods: Establish how the cost performance will be measured to see if you’re meeting the goals and expectations of the project. To do so, you’ll need a cost tracking system and earned value management (EVM) techniques.
- Reporting Guidelines: You need to have a format and communication channels to report your findings as you monitor the project’s progress and present this data to your stakeholders.
Why Is Cost Management Important?
The main reason why cost management is so important in project management is that your cost management plan includes the guidelines and procedures needed to stay on budget. This is critical because otherwise, the organization could lose money as costs exceed profits.
The cost management process begins in the planning phase of the project, where costs are estimated and then a project budget is defined. Then, when the project is executed, the expenses are carefully monitored and recorded to make sure that they’re aligned with the budget.
When you have a project budget, it sets a baseline for project costs. That means it governs the decisions and directions you take when managing costs on your project. This helps you keep the project on track without overspending.
Cost Management Tips
The following are some tips to keep in mind as you’re working on managing your project costs.
- Plan for Inflation: Pricing is not set in stone, and any good budget is going to take this into account by allowing for a range of costs.
- Account for Natural Disasters or Potential Events: Expect the unexpected might sound silly, but you must have room in your budget for a weather event, personal issue or another unknown that will delay the project.
- Other Unexpected Costs: Not all unexpected costs are random. There can be legal issues, penalties associated with the project or unexpected labor costs, all of which you can’t budget for, but can inform your budget.
- Track in Real-Time: Having software to monitor the budget as you execute the project is key for managing costs. However, if you’re looking at data that isn’t current, you won’t be able to act swiftly enough to resolve issues. Therefore, you want to have software with real-time data tracking.
- Respond Promptly: Regardless of how you discover a discrepancy in your project cost, you must act immediately. The longer you wait, the more money is wasted.
- Size Accordingly: Some people think smaller projects don’t need project cost management. But small or large, you’ll want to manage costs.
In order to best manage project costs, you have to know your project inside and out. The best way to do that is at the start of the project by creating a thorough project charter.
ProjectManager Is Your Cost Management Software
ProjectManager is online software with the tools you need for cost management planning across all phases of your project. Because our software is cloud-based, project data is delivered in real time so you can immediately gauge the accuracy of your cost estimates against the actual expenditure.
Our resource management feature helps you keep your workload balanced, which reigns in costs. We also have easy-to-use timesheets, where team members can submit with one click and project managers can approve with one click. But, our most powerful feature for cost management is our project dashboard, which tracks project costs in real time so you can keep a close eye on your budget.
Free Cost Management Templates
We offer dozens of project management templates to help you manage your projects. Here are some templates to assist you as you go through the cost management process.
Project Budget Template
Our project budget template is ideal to document all your costs and set a baseline for your projects. It can be easily customized to meet the needs of your organization.
Resource Plan Template
You can’t manage costs without solid resource planning. Our resource plan template is the perfect tool to keep track of all the different resources that you’ll need to execute your projects.
Cost Benefit Analysis Template
Projects must be profitable, otherwise, it’s not a good idea to execute them. Before you start a project, make sure you do a cost-benefit analysis beforehand. Our cost-benefit analysis template is a great place to start.
Learn More About Managing Project Cost
When you’re working on cost management, you’re establishing policies and procedures to manage and control your project costs. Jennifer Bridges, PMP, speaks to the core knowledge you need to know in order to understand cost management on any project in this short tutorial video.
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