Blog On Project Cost Management
What is project cost management?
Cost management in project management involves the planning, estimating and overall control of budget. Cost management processes are in place to help project teams plan and control budgets during the project life cycle.
Why Is Cost Management Important?
The main reason why cost management is so important in project management is that your cost management plan includes the guidelines and procedures needed to stay on budget. This is critical because otherwise, the organization could lose money as costs exceed profits.
The cost management process begins in the planning phase of the project, where costs are estimated and then a project budget is defined. Then, when the project is executed, the expenses are carefully monitored and recorded to make sure that they’re aligned with the budget.
When you have a project budget, 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 overspending.
Project Cost Management Processes:
Project Cost Management is one of the most important Knowledge Areas. It involves the following 4 processes
1. Resource Planning
Plan cost management is the initial process of project cost management where you will be defining how the costs of the project will be estimated, budgeted, managed, monitored and controlled. Generally, techniques like WBS(Work Breakdown Structures) or historical data of similar kinda projects are used for defining the cost resource requirements which include time, material, labor, equipment etc. This process gives a rough outline of the number of resources involved and shows the optimum path to manage the project costs throughout the project lifecycle. Thus, the plan cost management process is performed at some specific predefined point in the project.
2. Estimate Costs
This is the second process of the project cost management plan that helps in estimating the cost of the resources required for project completion. Since cost is an important variable that ensures project success, you have to be very careful while producing the estimated amount of the total project cost. Throughout the project lifecycle, this process is performed at periodical intervals. A project manager uses various methods to estimate costs depending on the amount of information available.
3. Determine Budget
Determine Budget is the third process of this Knowledge Area where the estimated cost of individual activities or tasks is summed up to draw the cost baseline. The cost baseline of the budget includes all the authorized funds that are essential for project execution. This budget basically includes various reserves of contingency while keeping the management reserves far at the bay. Cost baseline is an authorized time-phased budget that is used as the initial point for monitoring and calculating the project performance and progress. This process is executed at specific points in a project which are generally predefined
4.Control Costs
Control costs is the final process of project cost management which is primarily concerned with the measurement of variances of the actual costs from the proposed baseline. Various methods and procedures are implemented here to track the project performance and expenses against its progress rate. Meanwhile, all these variances are recorded and compared with the actual cost baseline. Here, control costs process will be responsible for explaining the reason for variance and further assists the project manager in taking corrective actions to incur minimum costs. Thus it can be concluded that via control costs process, a project manager can control entire project expenses and close it within the agreed budget.
The benefits of implementing project cost management.
The project cost management process empowers you to plan a project well, make informed decisions once activities are underway, and measure success.
Keep track of multiple types of project cost, including:
- Direct costs – These include money earmarked for software fees and other mission-critical overheads.
- Indirect costs – In business, indirect costs are a fact of life. Each individual project contributes to your organization’s electricity bill, for instance.
- Fixed costs – One-off fees may be considered fixed, since they aren’t linked to time management.
- Variable costs – This type of cost rises if a project is extended or delayed. Staffing costs are a common example.
- Sunk costs – These are purchases that have already been made, effectively the cost is deemed to be sunk.
What are the challenges of cost management?
Cost project management can be tricky. Here are three challenges that frequently crop up:
- Lack of resources: If a project budget is too small, it can be difficult to secure the required labor, materials, etc., to complete the project successfully.
- Inaccurate estimation: Poor forecasting can occur when a manager is inexperienced or doesn’t fully understand the scope of the project. This can lead to cost overruns and affect overall profitability.
- Outdated technology: Project managers need access to intuitive, up-to-date technology and tools to manage costs accurately.
Project cost management tools -
A work management software like Adobe Workfront provides a centralized location for all project data and information, helping you to stay aware of variances in the budget, make approvals, track comments, and see all-important project data.
Cost management, similar to other aspects of project management, becomes complex with many variables in play. The process itself is elaborate and demands attention to detail along with a rigorous approach. The use of project management software can simplify this process considerably.
Let’s look at a few advantages of using project cost management software:
- Automation of cumbersome quantitative analysis during estimation and measurement helps avoid manual errors
- Integration of data across planning, estimation, budgeting, and control enables continuous monitoring and quick, proactive responses, rather than one-off interventions
- Decision-making is made easier as cost software helps evaluate alternate solutions using scenario forecasting and what-if analysis
- Clear and easy reporting in the form of dashboards and other rich UIs
- The complexity of multicurrency management in projects across different geographical locations is simplified with project cost software
- Many project cost solutions allow third-party integrations, so data can be pooled and analyzed
- Benchmarking and standardization are possible with the availability of performance data across multiple projects
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.
References :
https://www.ecosys.net/knowledge/project-cost-management/