The Basics of Project Cost Management
What is project cost management, why is it important and which tips can help you stay on track?
In Review – The Basics of Project Cost Management
There’s a lot to say about project cost management, to make the subject manageable, it is better to break it down into three parts.
Which are: Why is project cost management important to discuss? What is the process of managing project costs? What are some practical tips to help manage project costs?
Why Is Project Cost Management Important?
The best way to see how crucial project cost management is when managing a project is by performing a thought experiment. Let’s look at how a project works with and without having project cost management.
When you are using project cost management, 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 going over budget.
Without project cost management, the organization could lose money as costs exceed profits. Another issue is that you might incorrectly invoice your customers. All this leads to a sloppy budget and a dangerous inability to note when you’re overspending.
What Is the Process of Managing Project Costs?
Cost management is a way of managing project cost, which includes estimating project costs. Therefore, the first thing you want to do is to get an estimation of all your costs at the task level.
Once you have those figures, you can move onto the next step, which is developing a project budget. You want to baseline all the costs and create a set of actions that will keep you on track.
All of these initial steps are taken to control spending for the project. In order to track project costs throughout the project, consider making a template, or use our free project budget template. Once you have a template, start by collecting the labour, how long each task will take the hourly rate of each team member, material costs and all units of measurement.
Other costs to measure include travel, equipment and space expenses. There are other fixed and miscellaneous costs, of course, and you want to note them again at the task level. Once you have your budgeted amount, you can track it as the project progresses.
Some project costs are easier to collect than others. Labour, consulting fees, raw materials, software and travel are considerably simpler to chart than other costs that might change.
These more difficult costs include such things as telephone charges, office space, office equipment, general administrative costs and company insurance.
Tips for Managing Project Cost
Below 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 some other unknown that will delay the project. Always have a contingency plan.
- Other Unexpected Costs: Not all unexpected costs are random. There can be legal issues, penalties associated with the project or unexpected labour costs, all of which you can’t budget for, but can prepare your budget for.
- 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 is not 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.
Pro-Tip: 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.
There is so much to cover when dealing with project costs, the primary focus will be on three areas. They are importance, what it really is and useful tips used previously in managing costs in projects.
It’s important because by using cost management on your project, it helps you to set the baseline for your project cost. And then therefore, that governs the actions you take to keep the budget on track.
So ultimately, you are trying to prevent going over budget. But if not used the following could occur. The company might lose money because some of the costs could exceed the project, and also could cause your customers to be invoiced incorrectly.
So, let’s look at what cost management really is. Well, cost management is a process for managing your cost of your project and it includes estimating your cost.
The project cost is obtained through a detailed list with estimates for each task level, take that and develop your project budget.
So, the deliverable is, you have your project budget that you baseline all your cost again at the task level. And you take that, and it’s used to control the spending for your projects. So, ultimately there is a set of action steps you take to keep on track.
It is best to use a project budget template, we look at the project tasks and possibly subtasks.
Focus on labour, material cost and all of the cost, labour is measured in how many hours for that task and how much is being paid per hour. The task may have some kind of material cost, which is measured in units, and there is a dollar cost per unit.
There are other costs, like, travel, maybe any kind of equipment or space, and any other fixed or miscellaneous cost. Then at the task level, you have your budgeted amount, and as you track along the way, you ultimately get to what it actually costs for that task.
So, in the end, every task and even at the full-project level, you look at where you come out, such as are you under budget? Are you over budget, at the task level and at the project level?
Remember it is always best to focus on going under budget. There are a few things that should be pointed out on the template. Some costs will be easier to collect than others. Some of those look like your labour cost or even your consulting fees, maybe your raw materials, or even software license, and even your travel cost.
And then some of the costs may change, or they may be shared among other projects, or they may even carry over to other projects. And some of those look like, your telephone charges, maybe even your office space or office equipment, maybe your general administration, and your company insurance.
Here are some tips on how you can improve managing your cost. Firstly plan for inflation, if you have a project that is short in duration, it may not be impacted by inflation, unless an unexpected event occurs which could impact the inflation on your project.
If you have a longer project in duration that spans a couple of years, inflation may impact it. It may even make your cost increase or it may cause them to decrease.
You also want to account for natural disasters, as this can cause an unexpected rise in your cost, or even may impact some of the resources on your project.
Also account for any other potential events, such as industries which are impacted by possible union labour, or any kind of strikes, or similar events.
Include unexpected cost, which may look like legal fees which were not anticipated or any kind of penalties from certain industries, which may affect labour cost. For instance, if for any reason, you need a subject matter expert, those costs may be more than you anticipated.
Track these in real time so you can respond promptly. Size and scale the project accordingly, if any deviations happen, they tend to compound and impact your project negatively.
Regardless of the project size, cost management is imperative, because any deviation to cost will impact the budget negatively.
As for large projects, your cost management should have a greater level of detail. Both of these, small versus large, is typically the same process.
If you need a tool that can help you manage your cost on your project, then access one of the software tool provided by our partners.