Cost overruns are extraordinarily common in every single sector of performance, every industry, and every part of the world. They can reach enormous magnitudes in both short-term and long-term projects, seriously damaging their financial health and reducing chances for success.
Nevertheless, a comprehensive and systematic approach to cost management is a definite remedy to this problem. It serves to align project needs with available resources, supervise current and future expenses, and analyze cost performance. Thus, it can assist you in avoiding the risk of cost overrun a great deal.
In this article, we will:
- Define what project cost management is,
- Discuss its role in project planning,
- And overview its major components to help you see why you must invest in cost management yourself.
What Is Project Cost Management?
Cost management comprises all the activities for planning, estimating, and monitoring expenses across the project’s life cycle, from the very beginning till the end.
Here are the main objectives of project cost management:
- Calculate how much money is needed to perform tasks and duties involved in the project.
- Develop a project budget and allocate funds as per the results of cost estimation.
- Track down how much is spent on project-related activities and encourage compliance with the created budget.
- Gather statistical data regarding actual project expenses to inform future decision-making.
When all these objectives are achieved, you will take project costs under control, reduce the risk of loss, and maximize profit.
Role of Cost Management in Project Management
Cost management is an integral part of project management in general, and its contribution to the project’s success is more than vital. To understand why, let’s identify the primary purpose of project management and explore the issue of project constraints in some detail.
Project Planning and the Triple Constraint
As such, the primary strive of project management is to attain formulated project goals within a specific timeframe, scope, and budget. These three restrictive parameters are illustrated within the Triple Constraint Model as interdependent: a change in one of them inevitably entails changes in two others.
For instance, when the project’s scope is enlarged, the number of efforts and resources needed to complete it increases. As a result, the deadline and the cost of that project become altered as well.
In the present-day world of business, it is particularly important to remember the interdependence among project scope, timeframes, and costs. The modern environment is rapidly evolving and extremely competitive. It makes managers compromise at every step and choose between affordability and quality, speed and effectiveness, stakeholder satisfaction, and profitability. The list goes on.
Thus, you must always be aware of the fact that a decision to complete the project in a shorter term will entail the necessity to reduce the volume of project-related tasks or invest more money in skilled personnel and technology. Otherwise, you will likely fail to meet the deadline or the quality of your work will badly suffer.
Overall, the Triple Constraint Model is here to remind you of that.
Why Cost Planning Is Especially Important?
Statistical data shows that cost is the most critical factor in defining project failures and success:
- According to the McKinsey-Oxford study on performance in the IT sector, cost overruns in software projects can reach 66% on average, and in projects that are not related to software – 43%.
- However, IT companies are not the only ones to bear financial risks after going over their project budgets. A recent review of evidence from international construction industries revealed that an average cost overrun in medium-sized projects is as high as 32.5%, whereas in megaprojects, the number may reach 88%.
These statistics indicate that regardless of all the advancements in the practice and theory of project cost management throughout the last decades, many projects still suffer the consequences of inadequate expenditure prediction and control.
Partially, project cost overruns may be attributed to the lack of a clear strategic plan and managers’ inability to consider potential risks and environmental changes. However, cost underestimation can be validly named the leading reason why businesses go far above their budgeted expectations.
So, unlike a thoughtless attitude to cost management, a serious and careful approach to this essential practice can take you and your project a long way.
Project Cost Management: 4 Main Processes
The process of successful project cost management is conducted systematically and usually involves 4 steps:
- Resource planning
- Cost estimation
- Budgeting
- Spending control
In this section, we will overview each of them separately and identify their main outcomes/values.
Resource Planning
Resource planning is an initial stage in project cost management and is closely interrelated with the process of project planning as such.
To comprehend which resources are required to start and complete the project, you must know it from the inside out: its short-term objectives, long-term goals, and the environment where it is going to be realized. In other words, resource planning is impossible without a well-defined project strategy and a distinct idea of how to implement it.
Here’s the list of practices involved in resource planning:
- Project plan and strategy analysis.
- Assessment of internal and external environmental factors.
- Resource estimation (e.g., talents, equipment, intellectual property, etc.).
- Specification of work activities and procedures (based on project scope and timeframes).
- List of current resource deficits and needs (based on the results of the environmental analysis).
- Evidence-based proposal for resource acquisition and allocation.
The outcome?
A clear picture of the activities and resources needed to complete the project.
You will see what these resources and activities are, how much you already have, and how much you still must acquire. After that, you may proceed toward a more detailed estimation of project-related expenses.
Use actiTIME to plan out your project scope the easy way: create as many tasks as you want, set deadlines and priorities, allocate work to employees, and then track their performance via a variety of visual progress tools.
Cost Estimation
Cost estimation means the assessment of the total amount of money necessary to perform the project.
Use information obtained at the previous stage to sort out project costs: since you already know the quantity and types of required resources, the primary task here is to identify their prices as accurately as possible. Then, just sum up the numbers to see how much the project will cost you as a whole.
Consider carrying out a risk-based cost analysis as well. Evaluate potential loss due to a delay in the supply of essential production materials, some technical issues, or even a discharge of a very important employee. Choose anything that makes sense in your situation and add the predicted cost of the event to other estimation results.
Whereas regular cost estimation allows you to see if the planned project activities are financially feasible and optimize them accordingly, risk-based cost assessment shows how much money you need to use as a cushion against unpredictable and costly events.
actiTIME reports provide a wealth of invaluable data to inform your project estimation process: from detailed hour tracking results to staff-related expenses and billable time per task. Apply this historical information in analogous cost estimation to enhance resource management in your future work.
Budgeting
At this phase in project cost management, you will develop a budget – a summary of all expenditures and/or revenues involved in the project.
Here’s what a good budget does:
- States the final cost estimates.
- Clarifies how much money you will have at different stages in the project’s life cycle.
- Indicates how much funds could and should be allocated to certain project activities.
In the end, a well-developed project budget serves as the foundation for cost control that your team must perform to avoid excess spending and get more profit.
Set different types of budgets for entire projects and customers or individual tasks in actiTIME! Each budget comes with a visual progress bar that makes it super easy to monitor the use of resources over time and promptly address the risk of project overruns.
Cost Control
Cost control is all about identifying, monitoring, and evaluating project costs in order to reduce expenses and maximize the revenues of a business. It is carried out by comparing the actual financial performance of the project with expectations stated in the budget.
In an ideal situation, your team should always comply with budget estimates. However, since cost overruns are frequent and are difficult to control 100% of the time, it is important to ensure that all expenses are properly recorded and, consequently, subjected to a thorough analysis.
By comparing data on actual project costs with those stated in the budget, managers can detect flaws in their approach to project cost management and disclose factors that were left without appropriate attention but require consideration. In this way, it becomes possible to enhance the accuracy and quality of cost management and improve the financial performance of future projects.
Here is a list of major procedures involved in cost control:
- Compliance with budget estimates.
- Cost tracking via robust reporting tools or project cost breakdown structures.
- Cost evaluation throughout the project’s life cycle by comparing actual expenses with the predicted ones.
- Final assessment of the project’s financial performance as a means to inform future decision-making and improve project cost management.
actiTIME’s visual budget tracker is the ultimate tool for cost control! It highlights budget overruns in red and lets you analyze the collected progress data as an overall summary of the entire budgeting period or a detailed breakdown by day.
Conclusion
Although cost control is never painless, by approaching it systematically and attentively, you will increase the chance of the project’s success to a substantial degree.
Remember about resource constraints when developing the project plan, follow the 4-step cost management process explained in this article, and adapt it to your business needs and project ideas to gain even better results. The more experience and expertise in cost management you will get along the way, the easier it will become for you to complete any project within the budget and on time.
Lastly, to improve your resource planning outcomes and track project budgets with ease, consider adopting actiTIME. This multifunctional software solution has all you need for project cost management:
- Start by planning out your entire project scope: set deadlines and priorities for tasks, share other important details via comments, and allocate work to employees.
- Use detailed historical data from a multitude of reports to get more accurate cost and time estimates and analyze your financial performance at the end of the project.
- Allocate budgets to customers, projects, and tasks – manage not only work-related costs but also billable and non-billable time with their help.
- Take advantage of a variety of progress tracking tools to monitor project costs and other resources: visual estimate and budget trackers, multiple charts and reports, real-time widgets, Kanban board, and more!
Explore all these handy actiTIME features firsthand during a free 30-day trial. Sign up here.
