As project managers, we often work to deliver quality results within deadlines and budgets. However, we don't always get the proper training to manage project costs effectively.
When I first took on a project budget, I dove into the deep end, learning on the fly. Through perseverance and trial and error, I developed a solid set of tools and processes to navigate the financial complexities of projects. But it was no walk in the park.
This guide delves into the critical aspects of project cost management. We'll examine common challenges you might encounter and provide practical insights and tips to help you overcome them. By mastering these techniques, you'll be well-equipped to handle any obstacles in the way of project success.
What does project cost management entail?
Project cost management encompasses planning, estimating, monitoring, and controlling each expense associated with a project. This involves accounting for the cost of resources required to execute the project, such as labor, materials, and equipment. The primary objective of effective project cost management is to ensure that expenditures remain within an agreed-upon budget.
Project cost management is intrinsically linked to resource management. As you estimate the anticipated costs for your project, it is crucial to consider the time and effort required from your team members. This process often involves making trade-offs.
For instance, you could expedite project delivery by assigning highly skilled and experienced professionals to the tasks. However, this approach might result in higher costs than your organization, or client is willing to bear. In such cases, it's necessary to adjust the allocation of resources to achieve successful project outcomes while maintaining an acceptable level of expenditure.
The stages of managing project costs
Managing project costs demands vigilance throughout the project lifecycle and a solid cost management plan.
Here are the cost management activities to consider at each stage of your project:
1. Project initiation – At this stage, determine the available funding. This depends on the client's budgeting in an agency or consultancy setting. When competing for work, prepare a response to the client's request for proposal (RFP), including a quote that covers the project expenses and allows your organization to make a profit.
2. Project planning – During this phase, plan the project delivery based on the available budget. Using the work breakdown structure, assign staff tasks based on resource availability and estimate costs for the anticipated activities. These cost estimates may be used in an RFP in an agency or consultancy setting. Once the contract is awarded, the statement of work (SOW) will include the planned costs for project delivery.
3. Project execution – Begin working on project tasks according to the developed project plan. As a project manager, you know this is the stage when the planned budget encounters real-world challenges.
4. Monitoring and controlling – As the project progresses, review actual costs against prepared cost estimates to ensure adherence to the plan. Make adjustments based on execution realities (e.g., if a deliverable takes longer than planned, substitute a lower-cost resource or compensate by reducing costs elsewhere in the project). Here's how you can use earned value management to measure cost performance.
5. Project closure – Document the actual budget versus the estimated cost baseline expenditure. Be sure to incorporate lessons learned after project completion. This will help you refine the future project cost estimation or improve the monitoring and controlling process for a better understanding of cost incurrence.
What are the challenges of project cost management?
Here are some challenges you may encounter in project management when it comes to managing project costs:
- Lag between cost incurrence and reporting: The time gap between when costs are incurred and when they are reported can lead to unforeseen cost overruns. Maintaining clear communication with your team members is essential to ensure you have an up-to-date understanding of the direct and indirect costs and can make adjustments as needed.
- Risk of using incomplete labor rates: When estimating costs, it is vital to use comprehensive labor rates that include all relevant costs, such as overhead, benefits, and additional expenses. Consulting with your finance department can ensure you're accounting for all costs, resulting in more accurate project cost management.
- Lack of or inadequate project cost management software: Your organization may need more tooling to manage project costs optimally. In the early part of my career, I was displeased with the quality of my organization's enterprise cost control software, so I created self-service tools, like spreadsheets, to track and control costs for my projects.
While this makeshift solution controlled cost management, there were more efficient and accurate approaches. Investing in dedicated project cost management software would have likely improved overall project success and confidence in managing costs.
Six tips to overcome project cost management challenges
While project cost management may be challenging, there are some strategies that you can deploy to manage costs effectively throughout the project lifecycle:
1. Build a buffer into your project budget
Set yourself up for success by ensuring you have enough slack in your project budget to account for any unexpected changes. Apply a 10% contingency as a top-down measure or build contingency into your bottom-up project activity cost estimates. This way, you can absorb unforeseen expenses without jeopardizing the project's financial health.
2. Assign resources wisely
Familiarize yourself with your team members and their skill sets to ensure they execute the tasks they are best suited to perform. This approach promotes efficiency, helps ensure that your cost estimates are realistic, and maximizes the return on the resources you have available.
3. Get a sneak peek of project costs
Work with your team to establish a system for reporting billable hours and activities during project execution. This allows you to verify that their efforts align with project priorities and helps prevent significant deviations from the plan. Regular check-ins and progress assessments can also help maintain cost control.
Float's resource planning software helps you keep track of billable hours through pre-filled timesheets. Set the hourly rate for employees and contractors so you can quickly see the total cost of assigned tasks.Learn more
4. Negotiate any changes in scope
Regularly review your project charter and scope statement to ensure alignment with project goals. If the client requests changes that impact the scope, renegotiate the SOW to accommodate these expectations, secure additional budget, or present trade-offs for decision-making.
5. Adjust the level of effort as needed
If an actual cost exceeds the planned cost estimate, take corrective actions by substituting lower-cost resources, improving efficiency, cutting project scope, or requesting additional funding. Continuously monitoring project costs enables you to make data-driven decisions and maintain financial control.
6. Own up to any mistakes immediately
In case of cost overruns, take responsibility and communicate with affected stakeholders as soon as possible. Collaborate with your internal team to handle the issue, decide whether to absorb the additional costs and craft effective client communications that maintain trust and positive relationships.
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