How to do Cost Management in Project Management

How to do Cost Management in Project Management

Cost Management is one of the key knowledge areas of project management professional (PMP) training and certification.

As the name indicates it deals with all things money associated with the project. In very generic terms every single activity in a project leads to cost be if effort, labour, license, material, travel, equipment and others.

In a more contextual sense, Cost Management is all about:

  • estimating the project budget
  • planning the allocation of the budget to various phases and aspects of the project from initiation to closure
  • constant monitoring and controlling the budget to deliver the project within the agreed budget

Project Budget is the deciding factor on how you will run, manage and complete your project.

Once you have arrived at a budget, it obviously needs to be signed off/approved by your PMO and the stakeholders to ensure you have the right buy-in.  Hence, a robust business case before initiating a project proves helpful in generating the right awareness and interest in the project.

Understanding the Cost Management Process

The overall objective of Project Cost Management is to ensure maximum ROI and eliminating unwanted costs.

The Cost Management Plan of your project management plan covers all the aspects in terms of budget, allocation and management of your overall project budget.

If you dig deeper, the project budget will include various types of cost.

Life-cycle Costs – these costs are mainly costs of perishables. Items that you will need to renew or buy after a fixed usage term.

Fixed Costs – are the ones that will be constant throughout the duration of the project. E.g. office rent.

Variable Costs – these include all types of materials, equipment, labour, training, licenses etc.

This tells us that a project manager must also have a solid business acumen on deciding the various types of costs he would be willing to spend and which costs he can minimize or exclude altogether in the best interests of the project.

How is Project Budgeting done?

As always planning lies at the foundation of your cost management process. The planning also includes your work breakdown structure (WBS). A robust task management approach that covers every minute detail w.r.t the project execution leads to a near accurate budget estimation.

So what elements must a project manager account for to arrive at an accurate project budget?

To begin with as astute project manager will definitely account for:

  • Hours required for each project activity
  • Total resources to meet these required hours
  • Skill levels of the resources working on the project
  • Training needs to meet the required skills if not readily available
  • Cost of equipment, hardware, software, licenses etc.
  • % of travel associated with the project
  • Number of resources that would need to travel
  • Recognition and awards expenses
  • Team building activities – (team lunches, any project specific events – go live, product launch)
  • Outsourcing costs if applicable
  • Contingency funds for any perceived as well as unforeseen risks
  • Penalties if applicable per your contract

Once all these costs are accounted for you can arrive at a realistic budget and accordingly set expectations with the stakeholders.

How to monitor and control the Project Budget & Costs?

To get started, depending on your project duration, size and complexity you need to decide if it makes sense to do a weekly or a monthly cost review.

But before that, you need an enterprise project management tool and robust processes that ensure all project activities are duly tracked in alignment with the overall milestone planning.

Note, at the beginning of the blog we identified that every project activity is equal to $$$

Hence, you must have a centralized platform that makes it easy for your project team to

Monitoring and control is all about constant project progress tracking to stay well-informed on where your project is headed to.

Quick Tips for efficient cost management

  • Setup weekly/monthly reporting mechanism in place
  • Ensure planned vs actuals are captured
  • Monitor reports on a weekly basis
  • Assess if there are budget overruns
  • Identify what caused the overrun
  • Analyse the impact of the overrun on your overall project budget
  • Ascertain if you would need additional funding and approval
  • Review the project plan every reporting period
  • List out items that need to be re-planned or eliminated if possible
  • Work out the available funds w.r.t future milestones planning and stages
  • Prevent scope creep at all costs

Basically, constant review of your time, expenses and personnel costs is key to optimum cost management and control.

Every additional spent hour or rework will hit your budget directly. Same applies for any unused licenses or overpriced equipment. Work with wisdom to see if leasing an equipment can reduce your cost instead of purchasing one.

Conclusion

Business is always all things money! Project Management is a proven means to achieve the strategic vision by aligning the troops on the ground and driving them all towards a shared project goal.

Hence, absolute clarity top down and bottoms up is a critical success factor in successful project management.

And to achieve that desired state you must have greater control over your projects’

  • Task management
  • Resource Management
  • Time Tracking
  • Expense Management

All of these roll into the project cost and budget management.

Thus enterprises across industries rely on project management platforms that provide real time insights to the executives for decision making, transparency around tasks, time, teams and costs.

Basically a single source of truth that helps not only control costs, keeps the resources aligned but also drive revenues for the overall business.

What’s your cost management strategy? How robust is your project management practice?

To learn how Orangescrum Enterprise Project Management software can help keep your projects within budget, set up a personalized demo today!

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