We have briefly discussed what is project cost management in our previous article, now we will go in a bit more in depth on this topic. To see more on cost estimation methods, take a look at our previous article here.

Project cost management (PCM) is a framework teams use to determine all sorts of money-related data, from building a budget to breaking down project cost variables. Acting as a powerful budgeting lens, it helps project managers check stock throughout a project’s lifecycle and control costs effectively.

Project cost management (PCM) is able to help the project team understand:

• Which areas of the project generate the most ROI

• Which tasks are limit project profits

• How different tasks eat into your budget

• Whether projects are actually profitable or unprofitable

• Where to charge more for your work

Phase1: Resource Planning

When conducting the project cost management, the first step would be to plan out the resources required to carry out the project from beginning to the end. When identifying the resources required, it is essential to understand the project objectives, long term goals and the project environment. These information would be then used as the foundation for developing the cost management plan. A cost management plan provides guidance and direction on how the project costs will be managed. Inputs for the cost management plan includes:

• Clearly defined project objectives & scopes

• A high-level work breakdown structure (WBS)

• A tentative resource management plan

Upon the completion of the planning, you may proceed toward a more detailed estimation of project related expenses. 

Phase 2: Cost Estimation 

With the cost management plan defined, you will need to estimate how much it will cost. Take into account all the resources needed to fulfill the project, from obvious requirements like people and hours, to less definite ones like ad-hoc problem-solving. Inputs for conducting cost estimation includes:

• Cost management plan

• Project schedule

• Risk register

Phase 3: Cost Budgeting

Once having an estimate for the costs involved, the project's cost baseline can now be created, which creates the grounds for the project’s budget. The cost baseline for the project is made by combining the cost estimates of the individual activities over the project's lifecycle. One essential item to be included in the cost budget would be the project reserve which is allocated to manage unexpected costs. Once the project budget has been established, the project's overall expenditures will be measured against the project budget which serves as a baseline.

Phase 4: Cost Control

With an approved budget and baseline, the next step would be to move on to execution, where it is important to monitor the task direction and check if there’s any deviation to the plan or scope of work, as it will likely create cost impacts. Cost control allows you to better understand how your actual project costs defer from the expected budget and take corrective action.

Manage Scope Closely 

This is probably one of the hardest to do and will have a devastating effect on the project budget if not managed properly. A project manager does not only have to manage the project scope by negotiating changes with the customer, but also managing the project team closely as they work with the customer. When the customers communicate closely with the team, they may add new requests to the project and the team may agree to it and end up spending more time than they should, which also means increased costs. This is called scope creep. Project managers need to warn the team of these types of situations, and keep up-to-date with the team’s interaction with customers regularly. 

Develop Relevant KPIs

A project budget cannot be effectively managed without establishing key performance indicators (KPIs). KPIs are able to help to ascertain how much has been spent on a project, the extent to which the project’s actual budget differs from what was planned, and so on. Here are just a few commonly known and used project KPIs that are essential to effective project budget management:

Revisit, Review & Reforecast

Frequent budget oversight is essential in preventing budgets from getting too far out of hand. A 10% budget overrun is far easier to correct than a 50% overrun, and if project managers don't keep an eye on budget and reforecast, that 10% overrun can turn into a 50% overrun. 

Project managers should review the number of people currently working on a project and the project’s future resource needs on a weekly basis. Doing so will ensure that the resources the project has will be fully utilized and that the project has the right resources.