How to manage Cost effectively

Cost management

Introduction

As a project manager arguably the most important function of project management is cost control. Cost control according to the Project Management Institute is the processes that are required to maintain financial control of projects (economic evaluation which initiates the project, estimating, organizing, controlling, analyzing, reporting, forecasting and taking the necessary corrective action.This is especially important because all other responsibilities affect this one. To your boss what matters at the end of the day is the bottom line. Not only that, The budget and cost affects every aspect of the project from how you handle problems as they come up to who can do what task, how long the project can take among many other factors. By implementing cost management strategies effectively you can have a clearly defined budget, improve communication, control scope creep, and overall track the progress of the project and ensure things are going smoothly. That’s why it’s important to take extra care to make sure this step of the equation is handled well. Cost management is known to not be completely figured out even today, but four major steps have emerged to help project managers plan for, control and keep track of project costs. I’d like to review those steps in detail.

Project Resource planning

The first step is Project Resource planning. This step involves figuring out all the resources needed to bring the project to completion. Resources can include things like equipment and people. This step should be completed before any actual work happens on completing the project and requires a work breakdown structure to be completed so that resources can be effectively allocated. During this step it’s important to keep in mind the timing of everything and to try to account for as many nitty gritty ground details as possible to keep the estimate as close to the reality as possible. It is also vital to listen to suggestions from employees and higher ups as well as looking at data from past projects to get a better understanding of the work that will need to go into the project Once you have planned the resources needed to finish the project you can move on to the next step of the process.

Cost estimation

The second step is Cost Estimation. This is the process of putting a numerical value on what the project will cost to complete. This is done using a variety of information. You’ll need the output of the resource planning step as well as a list of any assumptions you’re making, risks taken, past project history (if applicable), time limits, and vitally, how much each resource will cost. This can be one of the harder steps in the process as it’s important to make sure you are as accurate as possible. Putting a number to the resources can be tricky but there are ways to make it easier. Some can be carried over from step one such as talking to experienced co-workers and looking at past company data. There are a couple of different approaches to this. If your company has experience with similar projects you might want to take a top down approach as you will already have a ballpark number to operate from. If your company doesn’t have much experience with this type of project it can sometimes be easier to do a bottom up approach since estimating costs of each task and working up can be more accurate with little to no history to work from.

The third step is cost budgeting. This can be lumped in with step two at times but there they are not the same process. Budgeting involves allocating the total amount of resources dedicated to the project. This means planning what resources need to be given to each task or module and planning the timing of when sections of the project need to be completed. Budgets also plan extra funds for emergencies or unexpected costs or extensions to project time which happen very regularly. This can give us a good way to keep track of the progress of the project throughout as only having an abstract number of what the whole project will cost won’t help us gauge progress part of the way through as easily as a detailed budget plan. We can also use the actual progress of the project to update the budget as needed and keep an accurate record of costs for individual tasks and projects for the future. This aspect of budgeting is very important in the next step.

Cost control

The last step for cost management is cost control. This step takes place during the project’s execution and is continuously executed until the project is completed. Cost management involves taking note of variances from budget plans and adjusting to fit actual costs. Reporting such variances accurately and quickly is a crucial part of cost control as communicating changes to shareholders is extremely important to ensuring the success of the project. This can mean either expanding the budget or trying to cut costs by shortening tasks or finding ways to save money elsewhere. All the other steps serve as input to execute this step properly. It’s also to know information like who is authorized to make changes to the project, what levels of deviation from the original project estimates are acceptable and what kind of actions should be taken should deviations occur. The bigger the scope of a project the more important it is to make sure the budget stays within acceptable levels during execution. Things like scope creep can completely derail a project or inflate costs drastically if a careful eye is not kept on project budgets.

conclusion

Armed with these tools you can more effectively estimate the cost of projects you manage. Keeping everyone happy with the progress of a project is extremely difficult but one of the best ways to ensure shareholders stay happy with you and your work is to ensure that costs remain close to original estimates. This is why all these steps are so important and why keeping track of progress is vital to project success.

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