In an earlier post, we identified “non-feasible budgets” as one of the major reasons projects fail; the post highlighted the demerits of working with an unrealistic budget and how adequate budgeting was critical to the success of any project. To expatiate on that, we would be studying the concept of project cost management.
What is Cost Management?
Cost management in project management is the science behind the planning, allocation and control of the budget for a project or an organization. It is a process that makes certain that a project would be completed within an agreed upon budget and cost management in project management is a prerequisite skill for establishing yourself as a great project manager.
A good project cost management plan ensures that the organization does not overshoot their budget, thereby maximizing profitability.
The process involves a lot of project cost estimations and calculations, cost-tracking spreadsheet development, reviews and approvals from top management and the integration of a project cost management software.
4 Steps to Creating a Project Cost Management Plan
1. Resource Planning
Resource planning helps the project manager determine how much human resource, raw material, equipment and facilities that would be required to deliver on the project. At this phase, the project manager would be looking at all the physical resources necessary for executing the project.
So let’s say, a project manager is working on an IT related project, he would need to be made aware of what IT skills are vital to the project and what software or applications are relevant to the project.
A great way to do this would be to have a sit-down with a subject matter expert, professional associations and members of the project team to create a workflow structure (work breakdown structure). This will aid in the identification of components of the project that would require certain resources.
The project manager can also refer to data from past projects, consult the SOW document and ensure that all activities and requirements are in-line with the organization’s policies and procedures.
2. Cost Estimation
This involves developing an approximate value of how much the resources identified are going to cost. The process involves identifying and examining different pricing alternatives with the aim of going with the option that is most profitable for the company without necessarily compromising on quality.
At this stage, the project team would want to be considering resource requirements, the duration of activities, the work breakdown structure, information from previous similar projects concluded and resource rates (labor fees per hour, wholesale versus retail costs) .
There are 4 techniques for estimating costs, they include:
- Analogous estimating
- Parametric estimating
- Bottom-up estimating.
- The use of cost accounting tools or computerized tools
You can find out more about them by reading this post on, “How to Accurately Estimate Project Cost and Duration”.
3. Cost Budgeting
Now that we have gotten our cost estimates, the next step would be to do the cost budgeting. This refers to the allocation of cost estimates to the identified project components that require a certain amount of resources.
It makes use of the project schedule (where costs are allocated by time periods), work breakdown structure and cost estimates to come up with a cost baseline for the project. The cost baseline is essential for tracking project management cost during the project life cycle.
4. Cost Control
Cost control involves tracking and measuring financial variances from the cost baseline that we came up with during cost budgeting.
These changes could be as a result of an increase in the supplier’s rates that may be attributed to the scarcity of certain raw materials in the market.
It could also be that the time duration for certain components of the projects were just not enough or the introduction of a more efficient software of tool into the market that was not available during the resource planning phase but which the project manager felt was a better fit for the project as opposed to a lower priced one that was initially agreed upon.
It takes into cognizance any changes that might have occurred at the different project phases and alerts top management and stakeholders of all the relevant changes.
Project Cost Management Software
If you are looking for a great project cost management software, then you should check out the Nutcache project management web app. Nutcache is a great all-inclusive, cloud-based project management solution that comes with project cost management features. With that, project managers can easily:
- Set up a budget with milestones and alerts
- Decide if the budget scope will be global or specific (per member/per task)
- Track the progress of the budget as it approaches its threshold
- Quickly and easily customize project invoice by Task hourly rate, Member hourly rate, Project hourly rate or by Project fixed-fee.
Was this post helpful? Please do let us know by leaving a line or two in the comment section below.
