One of the most crucial aspects of Project Management is to make sure that the costs are within the limits. The costs should be within the project budget framed initially. Nevertheless, even people taking Project Manager roles regularly in organizations struggle with effective project cost management in many instances. Right from the Project Planning phase, the Project Management faces hardships between resource allocation and ensuring the right cost control.
What is Project Cost Management?
Are you wondering what is cost management in Project Management? If so, you should understand that project cost management is the process of estimation, budgeting and control of costs all through the project life cycle. The goal of a Project Manager should be to keep the project expenses within the approved budget. For a project to be called successful, it is essential that:
Its quality of execution is of a high standard.
It delivers on the scope and requirements of the project.
It is completed within the budget and schedule.
So, Project Management cost is one of the pillars of Project Management. It is relevant irrespective of the domain be it construction, technology, retail, production, etc. It aids with the creation of a monetary foundation upon which project representatives can standardize the present status of the cost of their project. Further, they can also reorganize the movement if required.
Objectives of Project Cost Management:
Now, you know what is Project Management cost. It is better to understand its objectives so that you can arrive at an informed decision:
To evaluate the money required for the performance of duties and tasks associated with the project.
To create a budget for the project and allocate funds based on the cost estimation results.
To identify how much is spent on activities related to the project
To motivate compliance to the budget created.
To collect statistical data on real expenses of the project to inform decision-making.
When these objectives are achieved rightly, you can increase the chances of taking project costs under control. In turn, you can bring down the risk of loss and increase profit as well for your employer.
How Can Your Project Benefit from Cautious Cost Management?
Managing costs is an essential part of any project. The budget framed for the project can have a considerable effect on the overall project goals. It will have an effect on the crucial decisions all through the project life cycle. It will also identify whether it is possible to meet the quality, delays and scope of a project. If the expenses associated with the project are not consistent with these goals, the probability of deliverables failing will be more. It can either underperform or over-achieve than what is expected by the client.
Controlling the cost will generate some crucial metrics. These metrics are referred to as Key Performance Indicators. They will help with keeping track of project progress and performance. In turn, communication with stakeholders will become easier. Even, it will aid with making sure that you and your team are moving in the right direction.
In short, with Project Cost Management, you can:
Ensure that your project sponsors and stakeholders get a clear understanding of the key project requirements.
Ensure their consent to quality standards and requirements
Keep an eye on the progress of the project in real-time for better decision-making.
Communicate clearly with stakeholders about the progress of the project. In turn, you can ensure that the project moves as per their expectations.
Track Key Performance Indicators like Return on Investment to evaluate and record the success of your decisions for forthcoming projects.
Know about Project Planning and the Triple Constraints:
The fundamental objective of any Project Manager is to attain the formulated project goals. Also, he will be particular about achieving the set goals within the budget, scope and time frame of the project. These three restrictive parameters in any project are explained within the concept called Triple Constraint Model.
Based on this model, these three constraints are dependent on each other. A modification in any one of them can bring a change in the other two. For instance, let us consider that the scope of a project expands. When this happens, the effort and resources required for completing the project will increase. Even, there will be a resulting change in the overall cost and deadline of the project.
This model is being used by Project Managers from across the globe for more than half a century now. Due to these many years of usage, it has turned out to be a practice standard in the long run. As fundamental as it is, the triangle schematically denotes the boundaries of the project that serve as the base for resource planning.
In the present competitive business world, it is crucial to remember the interdependence between project scope, cost and time frame. The present modern environment is quickly improving and turning out to be highly competitive. It makes managers jeopardize at each step and select between quality and affordability, profitability and stakeholder satisfaction along with speed and effectiveness.
With this knowledge, you should remember one thing when you decide to complete the project within a short period. You should bring down the overall volume of the tasks related to the project. Otherwise, you will have to invest more money in technology or in hiring skilled people. When you do not do one of these, the likelihood of not meeting the project deadline will be more. Even, it can have an effect on the overall quality of the work.
Steps in Project Cost Management:
As a Project Manager, you should be aware of the steps involved in the project cost management process. Experts recommend that this process encompasses four steps. They are resource planning, estimation of cost, budgeting cost and controlling cost. Let us gather more details about these steps here:
1. Resource Planning:
You might be aware that resource management is all about planning, allocating and scheduling the resource required for each stage of the project. It gives high importance to the costs connected with each resource.
Due to the complexity associated with this step, it is better to use a Work Breakdown Structure or WBS. It will provide clarity by simplifying the process. When you have WBS in place, you can identify what resources will engage in the completion of each item in the list. Even, it will help you identify the associated costs. You can also perform a cost-and-benefit analysis with it. When you engage in resource planning, the tips given below can come in handy:
You can consider historical data for reference like past efforts and schedules.
You can take feedback from team members and SMEs. A combined approach will work particularly in projects without any past data to use.
Evaluate the effect of time on resource requirements. For instance, a resource may be available only for a few months. When he goes away, there are chances of the project dragging. In turn, it can affect cost estimation.
2. Cost Estimation:
This step in the project cost management process involves quantifying the costs connected with all the required resources. You can estimate the cost only when you have the information given below:
Data on the financial health of your company and reporting structures
Industry benchmarks if any on project cost
Past project costs
List of assumptions
Duration for which each resource is required
The cost involved with each resource. It can be anything like material cost per unit, the cost to spend on procuring servers, the cost to hire vendors and staffing cost per hour.
Resource requirements as identified in the previous step.
The thing to remember here is that estimation is undoubtedly the hardest step in the project cost management process. The reason is that you should do it accurately. Further, as a Project Manager, you will have to consider factors like time value of money, inflation, overheads and variable and fixed costs. When there is a greater difference between the cost estimation and actual cost, the chances of project failure will be more.
When talking about project cost estimation, you can follow one of the many approaches available. For instance, let us consider that you have a lot of historic data. In this case, you can choose the method called Analogous estimation. Even, you have other options like Parametric Modeling or program evaluation and review technique. These are mathematical techniques.
3. Cost Budgeting:
You can see cost budgeting as a portion of cost estimation. Even, you have the option to consider it as a separate process by itself. Budgeting is the process of allocation of costs to a particular chunk of the project. It can be anything like individual modules or tasks for a particular period of time. Budgets encompass contingency reserves allocated for the management of unexpected costs.
You can understand this concept better with an example. Let us consider that the total cost estimate for a project is $2 million. This project will run for three years. In this case, the Project Manager considers budgeting only for the first two quarters initially. He does it as budget allocation is a function of time. For this period, he estimates that it would cost around $35,000 with the help of WBS and some estimation methods discussed above.
The good thing about budgeting is that it can function as a baseline cost of the project. Upon it, you can do ongoing measurement and judging of project cost performance.
4. Cost Control:
This step involves measuring cost differences from the baseline. The Project Manager does not stop with measuring but will take suitable actions like reducing the work scope, increasing the budget, etc. This step is an ongoing process and as a Project Manager, you should do it all through the project lifecycle. The focus here is much on clear and timely reporting.
Now, you know what is project cost managementand its importance. Even, you are aware of the process involved in doing it. You can now start planning things accordingly.
Don't Miss Out On Amazing Benefits!
©️ 2023 SimpliAxis All Rights Reserved. The certification names are the trademarks of the respective authorised bodies
Get coupon upto 10% off