What Is Cost In Project Management?

Did you know that according to research, over 27% of projects go over budget? In other words, not being able to manage costs can cost your project dearly (and quite literally). Considered to be one of the three pillars of project constraint, cost management is a process of maximizing project value and minimizing investment. In this blog, we will look at how you can use cost management to boost project performance and keep your team members productive and your projects within the budget. Let’s jump right in.

What is a Cost Management Plan?

According to the APM Body of Knowledge:

“Cost planning and control is the estimation of project costs, the setting of an agreed budget, and management of actual and forecast costs against that budget.”

In simpler words, cost management is the process of predicting, allocating, and controlling project costs to avoid budget over-shoots. As you might have guessed, estimating project costs occurs during the planning phase of a project and needs prior approval before the project takes off.

Moving on, let’s look at the two types of costs you should be concerned with.

The Two Categories of Cost Management

Generally, there are two types of costs involved with every type of project. The costs include:

• Direct Costs: These are one-off costs that are necessary for project completion and arise from a single department, such as employees, outsourced contractors, machine setup, materials, equipment, engineering tasks, etc.
• Indirect Costs: These are costs that are incurred by the company/individual and occur at the same time as the project. Examples include overhead operational expenses such as office rent, utilities, insurance, quality control, and so on.

Additionally, the cost management process can be divided as:

• Cost Planning: This process requires project managers to analyze their costs and manage demand for resources. Plus, it allows managers to view their planned costs against a cost baseline and evaluate the project cost performance.
• Cost Control: Cost control, on the other hand, refers to the process of measuring cost variances from the baseline, controlling and recording monetary expenditure, minimizing costs, identifying areas of cost overspend, and taking corrective action to bridge the gap.

This brings us to the next important section, which is:

What are the Benefits of Cost Management for Your Business

There are several benefits to managing project costs with great accuracy. These include:

• Accurate Budgeting and Estimation: Project managers can predict expenses, plan the budget, and allocate total costs early on to lower the chances of budget overrun.
• Monitor Expenses: They can document expenses and track them in real-time.
• Future Planning: Project managers can analyze predicted costs and actual costs, and can extract invaluable insights related to project progress as well as performance. These project management reports can double up as benchmarks for future cost management plans and help identify long-term cost trends.
• Resource Optimization: Project leaders can map out resources needed for their project correctly and reliably.
• Cost Preparedness: Project managers can prepare for unforeseen risks beforehand and stay vigilant throughout the cost management process. This ensures that the project is completed within the stipulated budget and time frame. It also empowers them to respond with sound corrective actions in a speedy and smart manner.
• Set The Right Expectations: A clearly-defined cost plan can help set clear expectations with stakeholders and bring forth great transparency between teams as well as stakeholders and the external customer.
• Improved ROI: Staying on top of your cost plan can ensure that you never stray away from the expected margin and continuously keep boosting your ROI.

Top Challenges of Cost in Project Management

Cost project management is a tricky business and often poses numerous challenges for project managers. These include:

• Lack of resources: Depending on how big or small your budget is, you may need to make adjustments with respect to the availability of labor, materials, etc., to achieve your end-goal.
• Improper estimation: Inaccurate cost forecasting can throw off your project and lead to cost overruns, damaging your company’s bottom line.
• Outdated technology: Since most projects embrace an agile methodology, project managers need to stay up-to-date with respect to the project management software and tools that can assist them in managing costs.

Now that you have understood the benefits and challenges of cost in project management, let’s look at the key factors to make a note of when drafting a cost estimation document.

What are the Top-5 Cost Estimation Factors?

To nail your cost estimation, you will need to first define the various types of expenses that your project will go through. To help you get started, consider the following five factors:

• Facilities: Consider the kind of external workspaces you may need to rent.
• Labor: Think about your team members’ salary, hourly rates of contract workers (if employing), and time needed to complete the project.
• Materials and equipment: Brainstorm the type of physical tools and materials you will need, such as software, legal permits, and so on.
• Risk: Make sure to create a rock-solid contingency plan to pre-prepare for risks.
• Vendors: Think about the kind of third-party vendors and/or contractors your project will need.

Pro tip: Make sure to include added elements such as past project costs/historical data, industry benchmarks, and insights into the company’s financial health for more accurate cost planning.

Once you have zeroed in on all these elements, devise an in-depth cost estimation document. You can create a cost breakdown structure (CBS) that defines the level at which costs will be collected.

Pro tip: Make sure to get inputs from your project’s key stakeholders and allocate the resources and assets accurately. 

Finally, if you are looking for a robust project/cost management tool, take into account the following factors.

Top-3 Factors to Look Out For When Selecting a Cost Project Management Tool

There are innumerous tools that can help you determine costs in project management. You can go for a versatile project management platform, which can cater to your costing needs as well. In terms of the preferred features, look out for the following:

• Budgeting: An accurate budget lays the foundation for effective project management. Hence, make sure to enquire for a budgeting tool–one that helps you to track costs, create custom cost management plans, and caters to all your financial needs.
• Time Tracking: Another important capability that comes in handy when estimating resource costs is the time tracking feature. It encourages team members to fill in their work hours using a task timer. More importantly, project managers can use this meaningful data to understand the time taken as well as the number of resources needed to complete the project within budget and on-time.
• Reporting and Analytics: Project managers can make use of real-time reports–complete with charts and graphs–to extract insights and get a 360-degree understand of the project cost performance and scope.

Wrapping Up

The integral role of cost management in project performance cannot be denied. After all, every project costs money, and budget plays an instrumental role in ensuring project success. It is important that project managers constantly revisit their cost management plan and make iterations in real-time to manage risks and reallocate funds as required. Plus, they should collaborate with other stakeholders and create a cost budget keeping everyone in the loop.

Finally, remember that without a predefined cost budget, your project can go haywire, produce inaccurate and expensive results, and lead to scope creep. Thoughts?