In a perfect world, project managers could execute their wildest, most ambitious project dreams without ever having to worry about the bottom line. In reality, though, PMs are beholden to budgets – and that means they have to know how to manage costs. Ineffective cost management is often the very reason that projects fail.
Read on to learn what cost management is in project management, plus how to do it well.
What is cost management in project management?
Cost management in project management is the system of determining, distributing and controlling costs for a particular project, usually guided closely by the project’s budget. Along with scope management and time management, cost management is one of the pillars of good project management.
How to Manage Cost in Project Management
Knowing how to manage cost in project management is often about taking a calibrated approach to your portfolio and understanding the various facets of costs that can arise during a project.
The following are a few tips and pieces of advice for managing project cost:
Estimate and budget
Planning is the first step to ensuring a project manager is aligned with the project management budget. During the project planning phase, meet with your team and compile a realistic estimate of costs. Consider all the project phases, tasks and activities the project will likely entail, and make sure the budget contains sufficient contingency. All people, material, hardware and software should be accounted for and the estimate should be used to achieve a baseline budget.
Once the estimate has been approved and the funds have been released, the project manager will have a baseline budget to work with and use against other project management costs. The monthly budget can now be worked out by dividing the estimated project length with your baseline budget. This will give you an idea of exactly what you can spend per month to stay on track.
Establish cost controls
Clear cost controls should be established (including sign-off responsibilities) for every expenditure. Part of maintaining a smart project management budget is planning who oversees what monies early on. Who will be approving and signing off on timesheets? Invoices? Knowing all of this is crucial to controlling the costs of a project.
Record costs and calculate metrics
To ensure you are staying within budget, you should be making cost comparisons between your estimated baseline and the actual amount of money being spent.Calculate metrics at the end of each reporting period, then compare the total amount spent with what you were expecting to spend. If the numbers are far apart, it means you’ll likely need to take some action to get back on track and stay under budget.
If any numbers are off, you need to update your forecasts to have a better understanding of how you will be using future funds more efficiently. You never want to let it get to the point where you are surprised about budget losses and need to ask stakeholders for more. Revisiting these numbers on a monthly basis will allow you to initiate any changes that need to take place and adjust the budget accordingly.
Knowing how to manage costs in project management is all about careful planning and continuous updates. Understanding who is responsible for what costs is also helpful for a project manager to stay under budget. Creating a monthly expected budget and frequently matching your forecasts to these numbers will ensure you are aligning tasks as closely to the budget as possible. And when the budget is on point, then the project is generally successful.
One thing that can make cost management in project management easier? Enterprise-level project management software. To learn how Clarizen can help you keep your projects on time, on scope, and on budget, set up a live demo today.