Project Cost Management – Know How To Manage Your Budgets

Cost is one of the major aspects that powers a project toward success. Thus, it is very important to ensure that there is a sufficient supply of funds coming in from the correct sources at the correct time to meet all the project requirements. Thus, project managers use a systematic approach to manage the overall cost expenses of a project, which is popularly known as project cost management. Through this article, I will give you a detailed explanation of what exactly cost management is, how it is done, and what the processes involved are.

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Project Cost Management

Project Cost Management is one of the ten Knowledge Areas that lay the foundation of project management. According to PMBOK^® Guide – Sixth Edition,

Project cost management is particularly concerned with the cost of various resources that are required to complete the project activities. It assists the project manager in foreseeing the project expenses and thus taking precautionary actions to mitigate the chances of over expenditure. Cost management acts as an umbrella process that covers the entire project life cycle, beginning from its initial planning phase until its completion and handover. 

The cost is generally estimated during the project planning phase and must be approved by the upper management before its execution begins. As the project gradually enters into the execution phase, all the expenses made are tracked and properly documented to keep expenses within the agreed budget. After project completion, this document is then used to compare the deviations between the predicted and the actual costs incurred. These results are further used as references for the curating cost management plans and budget in the future.

When we talk about cost, in terms of project management, there can be five types of costs incurred:

1. Fixed Cost: Fixed costs are those type of costs that are static and do not fluctuate throughout the project lifecycle.
2. Variable Cost: Variable costs are the costs that have a high tendency to variate depending on the duration of a project.
3. Direct Cost: Direct costs are the type of expenses which are directly linked to the project budget.
4. Indirect Cost: Indirect costs are those costs which are not particularly linked to your project but is shared across multiple projects.
5. Sunk Cost: Sunk costs are the costs that have already been incurred, but have failed to generate any value for the project’s objectives.

By implementing effective project cost management, you will get a cost baseline which will help you in managing all the above-mentioned costs better. It will give you a proper direction for better decision making and avoid out-running the project budget.

In the next, section of this project cost management article, I will be discussing the benefits you can avail with cost management.

Cost Management Benefits

The list of benefits of including Cost Management in your project management framework is pretty long. I have picked up a few of the most intriguing ones:

• It controls the costs of the specific processes/ activities which in turn helps in gaining control over the complete business cost.
• With proper cost management, you will be able to accurately estimate the future expenses and thus put your efforts towards generating the expected revenues.
• Cost management helps in predefining the expenses of all the project activities which are then maintained as business records.
• It prevents the over expenditure on any one business components and thus maintains the budget balance.
• It helps you in prioritizing your project tasks by strictly limiting the financial flow. Because of this, you will focus more on the activities that are actually needed in the project.
• It also reduces the extra expenses as all the expenses need to be approved by the manager before they are actually made.

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Project Cost Management Processes

Project Cost Management is one of the most important Knowledge Areas. It involves the following 4 processes:

1. Plan Cost Management
2. Estimate Costs
3. Determine Budget
4. Control Costs

1. Plan Cost Management

Plan cost management is the initial process of project cost management where you will be defining how the costs of the project will be estimated, budgeted, managed, monitored and controlled. Generally, techniques like WBS(Work Breakdown Structures) or historical data of similar kinda projects are used for defining the cost resource requirements which include time, material, labor, equipment etc. This process gives a rough outline of the number of resources involved and shows the optimum path to manage the project costs throughout the project lifecycle. Thus, the plan cost management process is performed at some specific predefined point in the project.

Below I have listed down the various inputs, tools and techniques, and outputs involved in this process:

2. Estimate Costs

This is the second process of the project cost management plan that helps in estimating the cost of the resources required for project completion. Since cost is an important variable that ensures project success, you have to be very careful while producing the estimated amount of the total project cost. Throughout the project lifecycle, this process is performed at periodical intervals. A project manager uses various methods to estimate costs depending on the amount of information available.

I have listed down the inputs, tools & techniques and output involved in the estimate costs process:

3. Determine Budget

Determine Budget is the third process of this Knowledge Area where the estimated cost of individual activities or tasks is summed up to draw the cost baseline. The cost baseline of the budget includes all the authorized funds that are essential for project execution. This budget basically includes various reserves of contingency while keeping the management reserves far at the bay. Cost baseline is an authorized time-phased budget that is used as the initial point for monitoring and calculating the project performance and progress. This process is executed at specific points in a project which are generally predefined.

Below table contains the various inputs, tools & techniques and outputs involved in this process:

4. Control Costs

Control costs is the final process of project cost management which is primarily concerned with the measurement of variances of the actual costs from the proposed baseline. Various methods and procedures are implemented here to track the project performance and expenses against its progress rate. Meanwhile, all these variances are recorded and compared with the actual cost baseline. Here, control costs process will be responsible for explaining the reason for variance and further assists the project manager in taking corrective actions to incur minimum costs. Thus it can be concluded that via control costs process, a project manager can control entire project expenses and close it within the agreed budget.

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Control costs process makes use of various inputs, tools & techniques and outputs, which I have listed in the below table:

With this, we come to the end of this Project Cost Management article. There are 10 Knowledge Areas in the project management framework and Cost Management was just one of them. If you wish to learn more about project management framework or project management certifications, you can check my other articles as well.

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