Project cost management: what is it and how to implement it

project costs management

Project cost management is an evergreen feature in all projects: big or small, from IT to construction. In fact, all projects require the purchase of any type of material or service.

Regardless of the scope or the program, projects need funds to complete the work.

Technically, even projects that use only manpower needfunds. Someone in fact is paying for that job.

Project cost management concerns the process of planning and controlling the budget of a project or company.

Without project cost management, the organization could lose its revenue as costs could outweigh profits.

The activities of Project COST management

Project cost management includes activities such as:

  • planning;
  • estimation;
  • budgeting;
  • funding;
  • management and control of costs.

so that the project can be completed within the approved budget limits.

Cost management covers the entire life cycle of a project, from the initial planning stage to the measurement of actual cost performance and project completion.

What is the process of project cost management?

Cost management is a way of managing the cost of the project and takes place in four phases, called the planning phase:

1) Resource Planning

In the initial phase of a project, it is necessary to define the resources necessary to complete the project activities (project team).

Work Breakdown Structures (WBS) and historical information of similar projects can be used in order to define which physical resources (and not) are needed. It is possible to think about time, material, work, equipment, etc.

Once all types of resources and quantities are known, the estimation of the associated costs can be determined.

2) Cost estimation

Several cost estimation methods can be applied in order to predict how much it will cost to perform project activities.

The choice of the estimation method depends on the level of information available.

Estimates based on the actual cost of similar prior projects can serve as a basis in order to estimate the current project.

Another option is to use parametric models in which the characteristics of the project are represented mathematically.

Estimates can be refined when more information becomes available during a project.

At the end, this translates into an estimate of unit costs with high accuracy.

3) Budgeting – (cost budgeting)

Cost estimation forms, together with a project plan, the input for the cost budget.

The budget gives an overview of the periodic and total costs of the project.

Cost estimates define the cost of each work package or activity, while the budget allocates costs in the period when the cost will be incurred.

A cost baseline is a budget approved that is used as a starting point for measuring actual performance progress.

4) Project cost control

the project costs management

Cost control concerns

  • changes in the baseline measurement of costs
  • the adoption of effective corrective actions in order to stay at a minimum cost.

The procedures are applied to monitor expenses and performance against the progress of a project.

All changes to the baseline of costs must be recorded and the final total costs expected are constantly forecast.

When actual cost information becomes available, an important part of cost control is to explain what is causing the change from the baseline.

Based on this analysis, corrective actions may be needed in order to avoid cost overruns.

Suggestions for a correct management of the project cost

  • Take inflation into consideration: the price is not fixed forever and, therefore, any good budget should take it into account.
  • Considering hypothetical natural disasters or potential events: expecting the unexpected may seem silly, but it is necessary to have a budgetary buffer for a meteorological event, a personal problem, or some other unknown factors that could delay the project.
  • Other unexpected costs: not all unexpected costs are random. Thanks to a structured risk management activity, it is at least possible to define the risk values according to the project. There may be legal problems, penalties associated with the project or unforeseen labor costs, for which it is not possible to provide a specific budget, but it is possible to prepare a buffer.
  • Real time tracking: having software that allows to monitor the budget during project execution is essential for cost management. If we analyze data that is not current, it will be difficult to act quickly enough to solve the problems.
  • Respond promptly: regardless of how a discrepancy exists in the cost of the project, it is necessary to act immediately. The longer you wait, the more money will be wasted.
  • Dimension: Some people think that smaller projects do not need project cost management. Small or big, in every project you have to manage costs.

To better manage the costs of the project, it is necessary to know the project inside and out, in all its details.

Project managers are in a difficult situation; in fact, they are the link between the customer and the project team that will complete the client’s project.

In most organizations, it is generally easier to get “more time” than “more money”, and there is usually more concern about how much it is spent rather than how much time is needed to complete a project.

Project managers and their stakeholders must enter any project with a common goal: to identify an accessible area and a plan on how to achieve it.

Too often, the cost is ignored in the project planning. But someone will eventually have to pay the bill, so why not make everything more organized and peaceful?

Therefore, it can not be ignored that cost management is essential for the success of the project. It can not be ignored that for an effective monitoring and if you want to intervene promptly in the management of costs, it becomes essential to have a project management software that tracks data in real time, such as TWproject.

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