Project management is a growing industry by all accounts. According to PMI, by 2027, businesses will need nearly 88 million FTEs in project management-oriented roles. This shows how important project management is – and how crucial it is to keep its costs as low as possible.
Without effective project cost management, expenses can spiral out of control, potentially leading to missed deadlines and financial losses for organizations.
Whether you’re working on a small project or managing a large, multi-department initiative, project cost management should be at the forefront of your plans. Read on to find out more about how you can maintain optimal cost project management.
Understanding Project Cost Management
Project cost management encompasses estimating, budgeting, and controlling costs to ensure a project is completed on time and within budget without compromising quality.
This process is dynamic and requires the project manager to think on their feet as they navigate changes to predicted budgets, track expenses, and make deadline alterations as the project goes on. Effective cost management helps reduce financial risks, making it easier to achieve project goals.
Project cost management is essential for both startups and established corporations alike. It allows them full control over projects and ensures that spending is kept as close to the initial budget as possible. This prevents any spiraling costs and protects profits.
Moreover, it helps businesses appropriately allocate their resources to where they’re most needed, reducing the risk of personnel mismanagement.
Below are some of the benefits of project cost management.
Increased Predictability
Effective project cost management calls for you to develop a suitable budget for the project. With an accurate budget in place, you can start to forecast expenses and revenue, giving you an insight into what the project will bring once it’s complete. This also minimizes surprises and financial setbacks.
Improved Risk Management
Project cost management also helps identify potential financial risks early on in the process, enabling you to take corrective action before they become significant problems.
Incorporating lien waiver management into your cost management plan ensures that payment compliance is handled efficiently, reducing the risk of disputes that could derail your project’s budget and timeline.
Avoided Budget Overruns
Good cost management practices help the business to prevent budget overruns. By identifying potential financial pitfalls early and ensuring every dollar is allocated wisely, you can keep the project on the right track within its financial limits.
Optimized Resource Allocation
Businesses typically have a lot of areas within the company that their resources need to stretch to. Project managers can assign resources more effectively with a clear view of cost allocation.
Not only does this provide enough resources for the projects at hand, but it also means that the remaining resources can be allocated elsewhere within the company.
Increased Stakeholder Confidence
When you’re running a business, there are a number of stakeholders to appease, from shareholders to suppliers. Stakeholders are more likely to trust and support a project that demonstrates strong financial discipline and uses CPM corporate performance management.
Regular reporting on cost performance gives stakeholders confidence that your project is on track and the business is handling the budget responsibly.
More Accurate Forecasting
Cost management allows for better forecasting in future projects. Once you have successfully completed a project within budget to the client’s satisfaction, you can take this formula for success and apply it to future projects. These insights based on previous project data make future budgets more precise and help in adjusting estimates in real-time.
Common Cost Management Issues
Despite the best planning, cost management can encounter some challenges, including:
- Underestimating costs – Sometimes, inaccurate estimates can cause projects to fall short of the necessary budget, leading to overspending and thus causing financial issues for the business.
- Poor communication – If stakeholders and subcontractors aren’t updated on costs, it can lead to conflicts and affect future project relationships.
- Delayed approvals – Slow approval processes can result in missed deadlines and higher costs, especially when last-minute purchases are needed.
- Inadequate risk management – Failing to plan for unexpected expenses or delays can result in a budget that quickly becomes unmanageable.
Creating a Cost Management Plan
Here’s a step-by-step guide on creating a cost management plan.
Define Project Scope and Objectives
The first and most crucial step in creating a cost management plan is clearly defining your project’s scope and objectives. After all, this will act as your guide that you can reference to see how on track you are at each stage of the project.
The project scope outlines lots of important elements, such as what the project will deliver, including its boundaries, specific goals, and deliverables. This step ensures that everyone involved understands what is expected.
Identify Resources and Requirements
Now is the time to list all the resources required to achieve the project’s objectives. This includes team members, equipment, materials, and services (plus whether this will be in-house or contracted out).
Each resource should be broken down into its cost components to create a detailed cost estimate. As we’ve discussed, you can use historical data from similar projects to get accurate resource estimates.
Develop a Detailed Cost Estimation
When it comes to optimal project cost management, it’s vital that costs are budgeted and accounted for throughout the planning and execution process. Cost estimation involves determining the costs of identified resources throughout the project’s lifecycle.
You can use historical data and cost-per-unit estimates or break down the project into small work packages to estimate each individually.
Remember to regularly revisit and adjust your cost estimations as the project progresses, as this is the best way to ensure accuracy (especially if you’re dealing with things like fluctuating material or labor costs).
Establish a Cost Baseline
Next, you’ll want to set up a cost baseline. This works as the approved budget for your project: it represents the total amount you expect to spend, broken down into tasks or milestones.
Sometimes, even the most meticulously planned projects can encounter unexpected costs, so the baseline should include a contingency reserve for unexpected expenses that might crop up.
Determine a Budget Allocation Plan
After completing your cost estimation, allocate the budget across different project phases. Ensure each department and team understands their budget for transparency and accountability. This helps teams identify and report potential issues to the project manager before the project starts.
Set up Monitoring and Tracking Systems
After determining the budget, you need to implement a system to track costs in real time. There are various tools and software programs you can use to make this a bit easier, like OneStream. To stay within your limits, remember to log expenses, track resources, and review the budget regularly.
Identify Potential Risks and Mitigation Strategies
Let’s face it: every project is subject to risks that can suddenly bump up the envisaged costs. Things like supply chain delays, price hikes, or labor shortages, for example, are all potential risks that you need to consider (and mitigate). Therefore, risk management should be an integral part of your cost management plan.
Implement Change Control Processes
Project changes are pretty inevitable, but if you don’t manage them properly, they can quickly lead to budget overruns. So, think about establishing a change control process to review and approve any modifications to the project that may impact cost. In line with this, only approve changes that match your overall project goals and budget.
Regularly Communicate and Review
Clear communication is essential to successful cost management – both internally within the team and externally to other stakeholders. Regularly update key stakeholders on the project’s financial health and be completely transparent if you’re anticipating any potential budget overruns. By managing lien waivers alongside other project costs, businesses can maintain transparency with stakeholders and safeguard financial control throughout the project lifecycle.
Evaluate and Adjust
Lastly, as the project develops, you should evaluate your cost management plan and be prepared to make adjustments as needed. Unexpected changes in the project scope, economic factors, or team performance can affect the project’s budget, so flexibility is essential.
The Future of Project Cost Management
Overall, it’s clear to see that project cost management is vital for maintaining financial control over a project. Maintaining optimal project cost management as the project develops isn’t easy, and it requires a lot of reviews and evaluations along the way.
By following the detailed step-by-step process above and calculating costs accurately, you’ll be well-positioned to achieve project success while maintaining financial discipline.