Project Cost Management Essentials
What is project cost management, why is it important for your projects success and how to create a project budget ? This article answers all these questions.
As an integral part of project management, cost management is the practice of planning and controlling the budget of a project. Cost management is a structure of management accounting that enables an organization to forecast expenses to help reduce the possibility of going over budget . Project Cost Management is a practice that uses technology to calculate project costs and efficiency through the life cycle of all projects.
Importance of Project Cost Management
The significance of cost control in project management success is something every project manager knows about. The ability to maintain an organized approach to tasks while staying aware of cost control is not very simple. In spite of the fact that time and resource management are indispensable to accomplishing objectives, cost management is at last what decides a positive project outcome.
Without a proper cost management, the company could lose money as expenses surpass benefits. Another matter is that you may inaccurately invoice your clients. All this causes a faulty budget and an inability to alert when you’re overspending.
What is the Process of Project Cost Management ?
Many processes can be recommended for an effective cost management. According to PMBOK Guide, Project Cost Management has four processes
1. Planning Cost Management
2. Estimating Costs
3. Determining Budget
4. Controlling Costs
Each process have inputs and outputs.
The first thing you have to do is to plan your cost management. Planning Cost Management is an essential process that establishes the policies, procedures, and documentation for managing project costs.
Then make an estimation of all your project costs at the task level for a proper cost management. Estimating is the predicting of project duration and costs. Creating the WBS (Work Breakdown Structure) establishes a foundation for estimating which prevents you to make mistakes. There are some tools such as Analogous Estimating, Bottom up Estimating, Expert Judgment etc. can be used at this step.
When you complete these steps, you can move to the next step, which is preparing your project budget. Determining the project budget is the most important steps of finalizing the planning of a project. You will baseline all the costs and establish a set of actions that will keep you on track at this step.
Then Controlling Costs process is one of the most important process in cost management. It is the process of monitoring the performance of the project to update the project costs and managing changes to the cost baseline.
The purpose of this process is to compare all the planned and actual figures and calculate the variances. The main benefit of this step is that it provides inputs to analyze the deviations from the plan in order to minimize risks and take actions if needed. Earned Value Analysis and Cost Performance Index can be used monitor the cost performance of the project.
Creating a successful project budget is the most important aspect of placing a bid or making decisions for the performance of the project. However many project budgets are created in an incompetent way which results in failure.
Many people think that the project budget only revolves around the labor and material costs. However the project budget extends from material costs to the cost of getting consultancy service. Some project costs are easier to estimate than others such as material labor, and equipment costs.
Below steps can be followed while creating a project budget ;
- Review the cost management plan
- Review the project scope
- Analyze the risk register
- Analyze the organizational process assets
- Create the project schedule
- Determine the resources
- Perform cost estimates for each activity and work package
- Assess indirect costs
- Create the cost baseline
Creating the cost baseline is an important step because it governs the decisions and directions when managing costs on your project.
Tips for Managing Project Cost
Below tips may be helpful for a successful project cost management.
- Prepare a baseline budget,
- Keep in mind the mark-ups,
- Add Contingency Reserve to your budget for managing identified risks,
- Add Management Reserve to your budget for unforeseen works,
- Use a software to tack your projects costs,
- Record actual costs,
- Analyze the procurement strategies,
- Calculate and update cost metrics,
- Update cost estimations regularly,
- Communicate with team members regularly,
- Control the productivity of resources,
- Bear in mind the travel costs for projects far from the company’s head office,
- Review the administrative costs,
- Make cost performance analyzes to understand the performance status
Whether you have a small project or a large project, it’s important to know that a project can not be performed without a proper cost management system. Project management success depends on the ability to establish an effective cost management system. Within a project, time, resource and cost issues are always important. Therefore the factor that often has the biggest effect on project success or failure is performing an effective cost management.
In this article we discussed cost management essentials. If you want to share your experiences regarding to cost planning and control, you can use the comments box below.