Cost management is the process of estimating, allocating, and controlling project costs. The cost management process allows a business to predict future expenses to reduce the chances of budget overrun. Projected costs are calculated during the planning phase of a project and must be approved before work begins. 

As the project plan is executed, expenses are documented and tracked, so things stay within the cost management plan. Once the project is completed, the actual costs are compared with the estimated costs established in the planning phase, providing benchmarks for future cost management plans and project budgets.

Project managers should not underestimate the business advantage of effective cost management. Here are 3 of the key benefits: 

Prevents Overruns: By allocating costs in the early planning stages, project managers ensure they don’t overspend on specific areas.

Avoids Risk: A good budget will have a risk allowance to ensure project success is not compromised if unforeseen costs arise. 

Aids Future Planning: Cost reports can help with resource optimization. This can lead to more accurate budgets in the future. 

The graph shows the level of accuracy for every cost estimation method and how much they are based on actual facts. For example, expert judgment is a very quick way to make cost estimation, however, it heavily relies on one’s perception while bottom-up estimate is the most accurate and detailed as the estimation is based on numerical facts. 

There are two processes within the cost knowledge area and planning process group: Estimate Costs and Determine Budget. Both are required in order to develop the project cost performance baseline.

Cost Estimate

The cost estimates are simply the costs associated with the work packages within the project schedule. Depending on the work package, the cost estimate may be determined using parametric, three-point, or analogous estimating techniques.

It is important for all cost estimates to include any assumptions that were made, where did the estimate originate, who provided the information, level of confidence, etc.

Budget

The budget is built using the cost estimates and the project schedule. The budget provides a view of how much the project is estimated to cost both from a total and a periodic perspective. This budget feeds the cost performance baseline which is then used as a critical ingredient in performing earned value analysis and other cost management variance analysis techniques.

The project budget must be in alignment with the organization’s funding limits in order to ensure the funding is available and has been appropriated.

Project Reserve

Project reserves is a key factor to be accounted for during project budgeting. Project reserves are additional funding allocated for uncertainties which may affect the cost of the project. There are two types of project reserves which are the contingency reserves and the management reserves. 

• Contingency reserves are the finance for the project cost estimates by the project manager to deal with uncertain events/risks that may happen.

• Management reserve refers to the budget or time reserve used to cope with unidentified risks. Typically, the management reserved would be controlled by the project sponsor or top management.